Revenue & Customs is blocking people from getting honours if they are found to be avoiding tax, says the Times.
The paper says that celebrities who use lawful but controversial schemes are being “blacklisted” by HMRC to protect the reputation of the honours list.
A Freedom of Information request showed the tax office used a traffic light system to identify their suitability.
A government spokesman said it was a “longstanding policy… to protect the integrity of the system”.
The Times’ report said HMRC analyses nominees to check the risk of them being exposed for their tax affairs.
They are categorised as green if they are low risk, amber for medium risk and red for high risk.
The list is then sent back to the Cabinet Office honours committee and the prime minister via secure email.
An amber rating – given to individuals who tax affairs would be “likely to cause adverse comment” – would damage their chance of receiving an honour, said the paper.
The paper said that the system was a “rare exception to the principle of taxpayer confidentiality”.
How does the UK honours system work?
British honours are awarded on merit, for exceptional achievement or service.
The honours list, announced twice a year, consists of knights and dames, appointments to the Order of the British Empire and gallantry awards to servicemen and women, and civilians.
Anybody can nominate someone living in the UK that he or she judges to be deserving of an honour – but must provide a detailed explanation and submit two supporting letters.
Whether someone gets an honour – and at what level – is decided by a committee specialising in that field (eg sport, business, education etc) which sends its recommendations to the main honours committee and then on to prime minister and the Queen
A document seen by the Times – which sets out the agreement between the Cabinet Office and HMRC – said that “poor tax behaviour is not consistent with the award of an honour”.
It continued: “Trust would likely be lost if an honour was awarded to someone with negative tax behaviours and those behaviours became linked to the positive recognition that accompanies the award of an honour.”
A government spokeswoman said: “Honours are given to reward outstanding service in a given field or area and each nomination is rigorously assessed.
“As a matter of longstanding policy, in order to protect the integrity of the system, government departments which may have an interest in a particular nomination – including HMRC – are invited to contribute their views during this process.”
This arrangement with HMRC was already highlighted on the gov.uk website when the Times put in an Freedom of Information request to the government in January to seek more details.
Its question, submitted just after the publication of the New Year’s Honours list, asked: “What rules and/or guidance are there in the honours system regarding the awarding of honours to people with criminal convictions and/or other potential flaws in their character, such as cheating at sport, drug taking, offensive behaviour?”
The Cabinet Office refused to give the paper the information and argued releasing vetting agreements with HMRC and the police could hinder the system.
But after appealing to the Information Commissioner’s Office, the paper was given the wordings.
The Cabinet Office has still refused to give copies of letters and forms send to lord lieutenants – the Queen’s representative in each county – who also take part in the vetting process when someone from their area is nominated.