Peerage committee was 'misled' over Ashcroft's tax status

Newly released letters detail warnings given to Tory donor
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Fresh controversy has broken out over the peerage handed to Lord Ashcroft after it emerged that the committee that approved his place in the House of Lords only gave its permission on the condition that he paid tax on his substantial overseas fortune.

Fresh controversy has broken out over the peerage handed to Lord Ashcroft after it emerged that the committee that approved his place in the House of Lords only gave its permission on the condition that he paid tax on his substantial overseas fortune.

Baroness Dean, a member of the Political Honours Scrutiny Committee (PHSC), which approved the peerage in 2000, said she was surprised and shocked when the Tories' billionaire deputy chairman revealed two weeks ago that he had kept his "non-dom" tax status for the past decade. She said the PHSC had been led to believe the peer's undertaking to give up the status had been fulfilled.

Lord Ashcroft has argued that he was given permission to become a long-term resident in Britain, allowing him to hold on to the non-dom status and avoid paying millions in tax. But evidence documenting the lengthy negotiations between the PHSC and the Tory leadership, released yesterday, showed that the committee warned repeatedly that Lord Ashcroft should be "domiciled" in the UK for tax purposes as a condition of entering the Lords.

The committee even asked Lord Ashcroft for proof from the Inland Revenue that he was paying tax in Britain. However, it finally agreed that he did not have to submit the proof immediately, and his peerage was rubberstamped. Correspondence also shows how the Tory leadership spent months arguing that Lord Ashcroft merely needed to be a resident in Britain to fulfil the PHSC's conditions, and that his tax status had nothing to do with the matter.

Sir Hayden Phillips, the Whitehall official who brokered an agreement over the conditions for Lord Ashcroft's move into the Lords, admitted he had not fully understood the major tax implications of allowing the peer to become "long-term resident". He had been told by James Arbuthnot, chief whip to the former Tory leader, William Hague, that Lord Ashcroft's tax status had nothing to do with his "solemn and binding undertakings" to return to Britain.

However, a crucial letter from the PHSC to Sir Hayden revealed that the committee did not agree. The 22 June 2000 note said the committee was "somewhat concerned" that Lord Ashcroft did not seem prepared to give up his non-dom status. "In their view the undertaking given by Mr Ashcroft did involve domicile as well as residence as defined by the Inland Revenue," the letter stated. "They do not feel that the undertaking set out in your draft letter yet meets their expectations." In a further letter on 12 July 2000, apparently believing that Lord Ashcroft had now agreed to bring his tax affairs "on shore" at some later date, the committee said he would not have to make the change "at this stage" and waved the peerage through.

Appearing before the Commons Public Administration Committee yesterday, Lady Dean said that she believed she and her colleagues on the PHSC had been misled about Lord Ashcroft's undertaking. "We were continually of the view that Lord Ashcroft would maintain his undertaking to take up permanent residence," she said. "It looks like the commitments and undertakings given were not carried through."

The inquiry heard that once the peerage had been signed off, there was no mechanism by which to check that Lord Ashcroft had actually become resident in the UK for tax purposes. Sir Hayden conceded to the select committee that the negotiations over the peerage may not have been concluded if the PHSC's concerns had been made more explicit. "If you are saying there was a misunderstanding about what the undertakings implied ... then that might well be the case," he said.

Yesterday the Tories attempted to finally drawn a line under the Lord Ashcroft saga. They also pointed to the peerage handed to Lord Paul, who has non-dom tax status and who has donated to Labour. William Hague conceded he had been wrong to say the Treasury would gain "tens of millions" of pounds in tax if the peerage went through and agreed the party faced legitimate criticism, but added that there was no secret cover-up.

But Business Secretary Lord Mandelson refused to let the issue lie, saying that the Tories had been "caught out"and that Conservative leader David Cameron had "neither the bottle nor the backbone" to stand up to his party's billionaire benefactor.

In an interview with the Press Association, Mr Mandelson said: "What is very clear now... is that William Hague, the then Conservative leader, knew then and has known since that [Lord Ashcroft] was not fulfilling or honouring the commitment he made to become domiciled in this country. Why hasn't David Cameron stood up to Ashcroft and said: 'This is unacceptable'?"

The Liberal Democrats' home affairs spokesman Chris Huhne added that Mr Hague was "guilty of a cynical cover-up for a shabby decision which has cost British taxpayers more than £100m".

Both Mr Hague and Lord Ashcroft refused to attend yesterday's select committee inquiry, arguing that it was politically motivated. Three Tory members of the committee also refused to attend.

The letters: How much did Tory leadership know?

Q What new facts do the letters reveal?

A We now know from the documents published yesterday that the Political Honours Scrutiny Committee (PHSC), which approved Lord Ashcroft's peerage in 2000, was always clear that it believed he had committed to becoming a full UK taxpayer. Responding to the suggestion that this may not be necessary, an official writing on behalf of the committee stated: "In their view the undertaking given by Mr Ashcroft did involve domicile as well as residence as defined by the Inland Revenue." The PHSC even asked for proof. It wanted to see one tax form showing that he had moved to Britain and a second confirming he was domiciled here for tax purposes. It approved his peerage without seeing the latter form.

Q Did Lord Ashcroft personally intervene?

A No, but his lawyers did. In a letter sent to the Tory chief whip, James Arbuthnot, on 29 February 2000, Allen and Overy said that it would be difficult for Lord Ashcroft to alter his tax status. "Given that Mr Ashcroft has lived abroad for many years and has substantial business and other interests abroad, as well as in the United Kingdom, there are many significant issues to be addressed, some of which are complex in nature," they warned.

Q So what went wrong?

A Sir Hayden Phillips, responsible for overseeing the approval of peerages, was lobbied hard by the Tories. Despite the PHSC's clear belief that he should give up his non-dom status, Sir Hayden wrote an ambiguous letter to Mr Arbuthnot on 12 July 2000. It does not explicitly tell him about the PHSC's conclusion that Lord Ashcroft should pay tax in the UK.

Q What information is missing?

A We still do not know whether the Tory leadership were clear that Lord Ashcroft was attempting to hold on to his non-dom tax status. But there are clues in the new documents. In one, it is made clear Mr Arbuthnot states that a Labour peer, Lord Paul, had been allowed to keep his non-dom tax status. Mr Arbuthnot was said to be "concerned about the appearance of inequity in the treatment of Mr Ashcroft in comparison with other non-domiciled Working Peers".