The Queen has been forced to give up the ultimate right to manage the Palace's financial affairs in a secret deal signed by Palace aides and the Government, The Independent has learnt.
A "financial memorandum" formalising the relationship between the sovereign and ministers also sets out tough terms on how the Queen can spend the £38.2 m handed over by Parliament each year to pay for her staff and occupied palaces.
The document, disclosed under the Freedom of Information Act, grants ministers the constitutional right to take over the direct management of the Queen's public wealth in the event of a disagreement over how the subsidy is awarded or spent.
It places the Palace in a weak position in its current negotiations with Government for an increase in Royal funding. Last night constitutional law experts said the memorandum could be used by ministers to force the Queen to cut back on her spending or even make her fall back on her considerable private wealth.
The deal follows disputes between the Palace and the Government over the growing costs and management of public money given to the Royal family.
Paul Flynn MP, a member of the House of Commons Public Administration Committee, said: "Someone appears to have gone to extraordinary lengths to protect the Royal family from public scrutiny. The more information we have about the public subsidy paid to the Queen the more confidence will we have in the institution.
"The Royal family is part of the dependency culture of Britain in the same way that Mr Cameron spoke about people living in a council house accommodation for life."
Graham Smith, campaign manager of the anti-monarchy group Republic, said that, given the growing disagreements between the Palace and ministers over Royal funding, he was surprised that the Secretary of State hadn't already activated the clause.
"It's good to know that the Government can use this power. But there are already 'irreconcilable differences' between the Government and the Royal household over how much of taxpayers' money the Queen requires, and between MPs and the Royal household about public access to the palaces."
The memorandum lists 70 clauses dictating the financial relationship between the Queen and the Government. But the key clause declares: "in the event of any irreconcilable differences over the interpretation of this financial memorandum or the memorandum of understanding, the Secretary of State shall be entitled to cease payment of grant-in-aid and take over directly the execution of her responsibility for the provision of property services for the occupied Royal palaces, funding for Royal communications, and provision of property and guard services for Marlborough House."
Under a court order approved by the Information Tribunal, the Department for Culture Media and Sport (DCMS) has disclosed hundreds of letters, emails and reports in respect of the growing public cost of the Royal family. Correspondence reveals the history of antagonism between the Palace and the Government over the public subsidies paid to the Queen.
In one exchange, it emerged that the Queen was handed £2m by the Government to help her cash-flow problems. Under pressure from the Palace, ministers surrendered disputed funds from the sale of land at Kensington Palace Gardens to boost the annual £15m grant-in-aid already given to the Queen. Ministers claimed all the sale fund should be paid into Government coffers while the Royal household countered that it belonged to them. The letters also reveal that the Queen won a £1m rates rebate for her palaces in the same year that she built up more than £20m in reserves from public money.
A spokesman for the DCMS said the sovereignty clause was based on the then new memorandum for non-departmental public bodies or quangos. He added: "This [the standard memorandum] would include whether there was still a need for the body, and whether it was as efficient as required. In the case of the Royal household property services, as Government does not have the same control over the Royal household, the paragraph was modified to achieve the same aim when there was a difference in interpretation that could not be resolved."
A centuries-old wrangle...
Ever since Charles I paid with his head for his attempt to impose on a fearful Parliament the notion that a king's power came direct from God, the English monarchy has fought a losing battle for control of the nation and its own finances.
Although the divine right to unquestioned rule had been relied upon from the Plantagenets to the Tudors, it took the protestations of Charles Stuart that his power was absolute and the English Civil War to secure a passing of the nation's purse strings from the Crown towards its uppity subjects. Charles I in effect sounded the death knell for the totalitarian monarchy by insisting: "Kings are not bound to give an account of their actions but to God alone."
With the supremacy of Parliament assured by Oliver Cromwell, the Glorious Revolution of 1688, which overthrew of James II, resulted in the separation of the expenses of monarchy from the general cost of running the state. Less than a decade later, the ability of the monarch to spend the Crown's income was curtailed under the reign of William and Mary.
Under an 1697 Act granting William III "subsidy... for the Service of His Majesties Household & other Uses", the monarch was granted £1.2m, of which £700,000 was to be used for the new "Civil List" to pay for the expenses of the civil service, the Royal Household and his lifestyle.
By the reign of George III, the monarch had surrendered all hereditary revenues apart from the Duchy of Lancaster, which to this day provides the Queen with her private income. In 1830, a new law restricted the Civil List to the personal expenses of the Crown and it has remained largely the case since. The Government expects a new system of "consoli- dated support" to be in place by 2012.
Battlegrounds: Palaces, pavilions, postage: spending issues that caused the auditor concern
Much of the Government's 2005 investigation concerned royal spending on the upkeep of Buckingham Palace and other palaces. The Department for Culture, Media and Sport later complained of a significant decline in the number of "jobs" considered to be good value for money.
Cricket at Windsor
The creation of a cricket pavilion for the Royal Household Cricket Club at Windsor Castle caused the auditor to complain: "During my review... I have noted several anomalies. The procurement of the prefabricated building does not appear to have been conducted in accordance with RHPS desk instructions... The property manager is investigating the situation."
The Prince of Wales's increased use of Birkhall, his private residence in Scotland, led the Department for Culture, Media and Sport to ask why his "dispatches (cost of redirecting his mail) have increased, and whether it is likely to continue". The Palace said it believed the increase "is likely to be permanent because of the frequency of his visits to Birkhall".