HMRC has started writing to private schools to advise them that the tax authority will be conducting employer compliance reviews, which could result in sizeable settlements with interest and penalties where mistakes are found.

This follows on from a number of targeted campaigns clamping down on potential tax avoiders including music teachers and second home owners, and reflects the increasingly hard line taken by HMRC when interpreting tax law.

The clampdown will primarily affect private schools where staff are provided with free accommodation, which is tax-exempt, compared with the associated utility bills, which are viewed as a taxable benefit.

Baker Tilly senior tax partner George Bull said: 'Most schools are heavily leaning on the exemptions available for work-related accommodation, but they need to ensure that these exemptions are being correctly applied to all resident employees.

'It's clear that some schools are providing accommodation which would not meet the strict requirements, but in any case, all schools should consider undertaking a review of their employees' duties to ensure that they fall within one of the exemptions.

'Even if the accommodation is exempt, many schools are providing electricity, gas, cleaning, decorating, gardening services and even furniture for resident employees, all of which represent a taxable benefit in kind reportable on forms P11D. Some schools ignore the provision of utilities on the basis that the properties don't have separate meters, but in reality this just makes the measurement of the benefit more complex and does not give any basis for exemption.'

If HMRC does proceed with a serious investigation, schools could be liable for settlement agreements dating back six years in certain circumstances.