The Ashcroft Affair: Revealed: The Tory deal that saved Ashcroft millions in tax

JOHN MAJOR'S government put pressure on the Central American state of Belize to save millions of pounds in tax for the billionaire Tory treasurer, Michael Ashcroft.

Inquiries by The Independent have established that the Foreign Office under Douglas Hurd asked the former colony's government to exempt the businessman's private bank from new tax laws.

The revelation will cast new doubt on the Tory leader William Hague's relationship with the man who has given his party pounds 2m in the past two years. Mr Ashcroft has already been criticised for keeping much of his business offshore in Belize, where he owns the main bank and stakes in utility companies.

Yesterday Mr Hague stood by his treasurer after leaked Foreign Office memos revealed deep suspicion among officials of the businessman and his methods. But the revelation of his party's support for Mr Ashcroft while it was in government will come as a far greater embarrassment. Although he was not party treasurer at the time, he has been a donor since the 1980s.

Last night the Labour MP Peter Bradley, who has questioned the Foreign Office about the affair, called on Mr Hague to remove the businessman from his party post.

Mr Bradley is expected to receive confirmation of the intervention from Tony Lloyd, the Foreign Office minister, within the next few days. Last night Whitehall sources confirmed that the department had intervened on Mr Ashcroft's behalf. A letter sent in August 1994 via the then high commissioner to Belize, David McKilligan, claimed that to remove his tax advantage would represent a breach of a UK-Belize treaty designed to protect inward investors.

Lord Hurd of Westwell, who was Foreign Secretary at the time, is now a member of the Political Honours Scrutiny Committee which recently blocked Mr Ashcroft's nomination for a peerage.

The Florida-based businessman, who funds the Belizean People's United Party, backed a1990 Bill which granted special tax status to his BHI corporation, the holding company for the Belize Bank. In November 1998 the company was worth pounds 170m.

In 1993 the rival United Democratic Party came to power and tried to reverse the provision. But on the instruction of the Foreign Office, the move was blocked. Although the change was subsequently made, Mr Ashcroft's bank escaped it because it was not backdated. Last year, a separate change finally created a level playing field.

Last night Manuel Esquivel, the Belize prime minister at the time, described the British government's intervention as "crucial" in safeguarding Mr Ashcroft's privileged tax status. "That meant company tax was 25 per cent instead of 35 per cent," he said. "There were only two of these companies, and Mr Ashcroft's Belize Bank was one of them. It had the effect of putting the other banks at a tremendous disadvantage.

"Mr Ashcroft's argument was that if he was made to pay taxes when his investment was on the basis of not paying taxes that would jeopardise his investment. "That letter was crucial. It meant that when we deleted that section from the law, he was exempted. We felt it compounded the unfairness. We were surprised the intervention was made for just one man."

Mr Bradley said if Mr Lloyd's letter confirmed the details Mr Hague would have to think carefully about Mr Ashcroft's position. "This is a very serious case, not just of sleaze in the last Conservative government but of sleaze in the current Conservative opposition," he said. "Mr Hague has to ask himself whether he can fund the Conservative Party without Mr Ashcroft, but he must also ask whether he can continue with him." The revelations follow the leak of two Foreign Office memos about Mr Ashcroft dating from 1996 and 1997. One of the documents said rumours about Mr Ashcroft's businesses "do cast a shadow over his reputation which ought not to be ignored". The other claimed he threatened to use local politicians to "stir up trouble" for the British government if he was not allowed to set up a bank in the Turks and Caicos Islands.

Last night the Tory party chairman, Michael Ancram, said the documents had been leaked as part of "an organised political vendetta against the treasurer of the principal opposition party." He has written to the Cabinet Secretary, Sir Richard Wilson, demanding a full inquiry into the leak. "Both documents were no doubt classified and the release of them would seem to constitute a prima facie breach of the Official Secrets Act," Mr Ancram said. The Foreign Office said a preliminary inquiry had been conducted into the leak.

Mr Hague, on a campaign visit to the Eddisbury by-election in Cheshire, insisted yesterday that Mr Ashcroft remained a fit and proper person to be Conservative Party treasurer. "I have seen nothing to the contrary," he said.