Bermuda is at the centre of a tax investigation of Mohamed al-Fayed, the billionaire Egyptian businessman and chairman of Harrods department store in London whose interests include a local trust.

In one of the biggest investigations of its kind, Britain's Inland Revenue has targeted Fayed's offshore business interests, Harrods Group, which includes the Bermuda-based Al Fayed Investment & Trust private partnership, according to a report in last week's edition of the Sunday Times. The group controls the Knightsbridge store and the financing of Fulham football club, the newspaper said.

The Inland Revenue is said to be studying a complicated tax avoidance scheme which allows Fayed to draw no salary from Harrods but lets him benefit from dividends -- totalling more than 100 million between 1995 and 1998 -- paid by Harrods Holdings to the Bermuda trust. The payment of dividends offshore is legal, the Sunday Times said, but what the taxmen want to know is if the money sent offshore returns to Britain as income for Fayed, in which case tax might be due.

The Bermuda trust is linked with two offshore companies based in Panama and the British Virgin Islands, and officials suspect that these and other offshore companies are under Fayed's control from the UK, thus making them liable for millions of pounds in corporation tax.

In March, with the investigation pending, the Inland Revenue cancelled an arrangement whereby Fayed and his brothers paid a fixed tax of 240,000 a year instead of undergoing an annual assessment because officials could not rely on certain information they were given on the businessman's tax affairs, the newspaper said. The Fayeds are contesting the move, and the newspaper said the investigations could yield tax bills totalling millions of pounds.

The investigation of Fayed was first launched after comments were made during a libel battle between Fayed and MP Neil Hamilton. Revenue officers were surprised that Fayed had access to large sums of cash -- as much as 50,000 a week -- which he withdrew from a London bank and said the information was inconsistent with that provided to the Inland Revenue.

According to the Sunday Times, pressure also came from Christopher Cope, the Conservative MP, who wrote to the Inland Revenue after the trial: "I believe there is an overwhelming case for a full investigation of Mr. Fayed's affairs by your special compliance unit.'' Attached to the letter was a file of alleged breaches of British tax laws.

The alleged dealings could tarnish Bermuda's image as a clean offshore jurisdiction, but Ross Weber, marketing manager for the Bermuda International Business Association, said the problem was purely a British one.

"If (Fayed) is declining to declare income for taxes in Britain, that is illegal on his part and has nothing to do with what goes on in Bermuda,'' he said.

Mike Warburton, senior tax partner at Grant Thornton, an independent accountancy firm, told the Sunday Times the probe would take in all aspects of Fayed's financial interests.

"Once the Revenue starts an investigation, it rarely confines it to one narrow aspect of someone's affairs,'' he is quoted as saying in the paper.

Further enquiries by the Inland Revenue will examine Harrods Limited's purchase of Alpha Airports, whose market value fell by more than half after the deal.

A spokesman for the Harrods chairman refused to discuss the investigation with the Sunday Times. The newspaper said lawyers for Fayed had accused the Inland Revenue of an "abuse of power'' and of being "oppressive.'' Fayed is tied for 22nd in The Sunday Times Rich List, which ranks Britain's wealthiest residents, and is said to have assets in the region of 1 billion. The businessman is an Egyptian national by birth and accused the Duke of Edinburgh and intelligence services of orchestrating the Paris car crash that killed Diana, Princess of Wales, and his son Dodi in 1997.

The Fayed affair was one of two times last week that Bermuda's financial services industry was dragged to the forefront in Britain. The most recent edition of the Sunday Times criticised the Labour government of hypocrisy with regard to offshore jurisdictions after the party received a 3 million donation from party supporter Christopher Ondaatje via an account with the Bank of Bermuda.

Al-Fayed BUSINESS BUC