George Osborne has demanded that Labour should pay the tax that was avoided when a party supporter made a £1.6m tax-efficient donation.
In a letter written to Ed Miliband, the Chancellor claims that the arrangements "appear to be directly at odds" with the Labour leader's recent pronouncements on Google's tax affairs.
The donor, John Mills, said the idea for making a donation in shares rather than cash came during discussions with Labour.
“It's quite a good model," he told the Daily Telegraph. "Labour has got people who deal with compliance and the legal side of all this. They are very sensitive nowadays.
"To be honest with you, it is the most tax efficient way of doing this."
The Chancellor's letter to Mr Miliband reads: “Can you confirm that the Labour Party advised Mr Mills on how to avoid tax on his donation?
"As leader of the Labour Party, and given your previous statements on tax avoidance, such actions by your party appear to be directly at odds with your public statements.
“Most importantly, will you now pass the amount of tax that has been avoided to the Exchequer? As you say, this is money that is needed to fund vital public services such as the health service and our schools."
Mr Mills said he gave the party £1.6m as shares in his TV shopping channel business JML, rather than cash, because it reduced the amount he would have to pay in tax. The donation is reported to have allowed Mr Mills to avoid up to £1.5m in tax this year.
Last month party leader Ed Miliband criticised internet giant Google for its tax affairs, arguing it should not be going to "extraordinary lengths"' to avoid paying UK levies.
The party insisted the unusual donation method had been "declared in full" to a party funding watchdog and was in line with the rules.
Today Mr Miliband said: "The reason John Mills gave us these shares is because he wanted the Labour Party to have a steady stream of income, which we will get from dividends.
"The Labour Party will be paying tax on these dividends, will be paying tax every year on these dividends, and that is what we will be doing."
"Lots and lots of organisations receive donations on this basis.
"I don't know whether George Osborne is going to be writing to all those organisations that receive shares in this way to say they somehow have got to pay back whatever money he is talking about."
A spokesman for the Electoral Commission said: "The Labour Party did contact the Electoral Commission prior to accepting the donation and we advised them that they could accept the donation subject to carrying out the necessary permissibility checks on the individual.
"Political parties can only accept donations from an individual who is on the UK electoral register.
"A political party must ensure that a donor is permissible as defined under the law, therefore, a party can accept shares, as long as the donor is permissible."
Labour declined to answer questions about whether it had agreed to the donation deal because it was tax efficient.
A Labour spokesman said: "John Mills' tax affairs are a matter for him. John has a been a Labour supporter for many years and we are grateful for his support.
"This donation has been declared in full to the Electoral Commission in line with party funding rules and it appears on the commission's public register. It is standard practice to discuss donations permissibility with the Electoral Commission."Reuse content