Tory party has been bought like a 'banana republic', says Huhne

Michael Ashcroft, the billionaire Tory peer, has not paid income tax on his vast overseas earnings for more than 10 years, it was revealed yesterday.

The revelation of his non-dom tax status, dragged out through the Freedom of Information Act, is an acute embarrassment for the Tories. It proves the party's deputy chairman, who is playing a pivotal role in the election campaign, was passing laws in the House of Lords while avoiding tax on most of his fortune. It also adds to the impression in voters' minds of the Conservatives as a party for the very rich.

When he was awarded a peerage, 10 years ago, Lord Ashcroft gave a "clear and unequivocal assurance" that he would become a permanent UK resident. William Hague, the former Tory leader who nominated Lord Ashcroft for a peerage, hailed that assurance as being worth "tens of millions" to the British Treasury, as the peer started paying UK taxes on his vast wealth.

But Lord Ashcroft has now disclosed that under a deal he brokered with the tax authorities he became a "long-term resident" of the UK, without being "domiciled" here. The distinction meant that he did not need to pay tax on the bulk of his fortune, which was made abroad, provided that he did not bring it into the country.

In a statement posted on his website yesterday, Lord Ashcroft said that during his private negotiations with the UK tax authorities, "it was officially confirmed that the interpretation in the first undertaking of the words 'permanent residence' was to be that of 'a long-term resident' of the UK. I agreed to this and finally took up my seat in the House of Lords in October 2000. Throughout the last 10 years, I have been declaring all my UK income to HM Revenue. My precise tax status therefore is that of a non-dom."

He also published the text of the letter he wrote to Mr Hague in March 2000, in which he promised "to take up permanent residence" in the UK by the end of that calendar year. He added that he had given his backing to a plan by David Cameron which would prevent any peers or MPs from having non-dom status, and that he plans to remain in the House of Lords "for many years to come".

His statement was welcomed yesterday by Mr Cameron, who said: "I am delighted that Lord Ashcroft has come out and said 'Right, you want to know the undertakings I gave – here they are, you want to know my tax status – here it is'."

Lord Ashcroft was first nominated for a peerage by Mr Hague in 1999, but he was rejected by the Honours Scrutiny Committee because he was a tax exile. On his website, he refers to Belize, in Central America, as his home.

For years, he has resisted giving any information about his tax status, but he relented yesterday knowing that the Cabinet Office was going to put out information later in the day. The Government had been ordered by the Information Commissioner, Christopher Graham, to answer a question put by the Labour MP Gordon Prentice, under the Freedom of Information Act.

Yesterday, Jack Straw, the Justice Secretary, accused the Tories of concealing the truth about their billionaire donor for a decade. He said: "Instead of paying tax in the UK on all his earned income, Lord Ashcroft has been channelling millions into the Conservative Party."

Chris Huhne, the Liberal Democrat home affairs spokesman, claimed the Tory party had been "bought like a banana republic". He said: "The Conservatives' biggest donor has not paid a penny of British tax on the vast bulk of his estimated £1.1bn fortune held offshore."

Labour and Liberal Democrat candidates have protested for years over the amount of Ashcroft money being lavished on marginal seats. His companies have donated £5.2m to the party since 2001, including £4.1m since Mr Cameron became leader. The Conservatives say no more than 10 per cent of the money spent in marginal seats had come from Lord Ashcroft. But privately senior Conservatives said they wish he had come clean months ago. They now desperately hope that yesterday's disclosure will draw the sting out of the issue.

The Tories attempted a fight-back, accusing Labour and the Liberal Democrats of hypocrisy because of the role non-doms play in funding their parties. They claimed that Labour had taken more than £10m since 2001 from eight non-doms, including Lord Paul who was made a Privy Councillor last summer. The Liberal Democrats also accepted nearly £3.5m from non-doms, according to the Tories.

Ashcroft’s tax - Why do we care?

Why does anyone care about where the Conservative Party deputy chairman, Lord Ashcroft, pays his tax? In part, it is because despite having donated more than £5m to the Tories (he is one of the biggest ever donors to a British political party) he has refused to say until now whether he pays any tax in the UK. He is also a central figure for the Conservatives and plans strategy in key marginal constituencies – directing how to spend his own and others' money in pursuit of electing David Cameron. In addition, his seat in the House of Lords – where he can influence legislation – was dependent on him committing to becoming a permanent resident of Britain.

The crux of the issue is that at first glance, there appears to be an inconsistency between the undertaking Lord Ashcroft gave to William Hague on 23 March 2000 to qualify for that peerage – a "solemn and binding undertaking" to "take up permanent residence in the UK again" – and his tax status as "non-domicile" (non-dom). HM Revenue and Customs rules imply that anyone classed as a "non-dom" for tax purposes cannot have their "permanent" residence in the UK. As the rules state: "You are domiciled in the country where you have your permanent home."

So Lord Ashcroft is only entitled to be a "non-dom" resident in the UK if his permanent home is abroad, presumably in Belize, where he has business interests and many other connections, and spent some of his youth.

But the fact that in 2000 he described his residency in the UK as "permanent" suggested that his permanent home may be here in Britain rather than elsewhere. That may be why Lord Ashcroft's statement yesterday dwells on a distinction between residency (usually irrelevant for non-doms) and permanent residency (highly relevant for tax if HMRC deems it means permanent home).

Ashcroft said yesterday: "In subsequent dialogue with the Government, it was officially confirmed that the interpretation in the first undertaking of the words 'permanent residence' was to be that of a 'long-term resident'." If he has settled this with HMRC it may be because he has indicated a longer-term ambition to leave the UK and retire elsewhere.

Lord Ashcroft is exposed because most non-doms qualify by their father's birthplace – "domicile of origin". If he is a "non-dom of choice" because his father was born in the UK, he is vulnerable to losing his cherished tax status. Usually a non-dom of choice has to show they have permanently emigrated or severed their UK links; being a member of the Lords and a major Tory donor might be regarded as quite a strong set of British connections, though his Belizean ones may be deeper.

Sean O'Grady, Economics Editor