The UK Independence Party (UKIP) said today that legal action to force it to pay back donations of more than £360,000 would dramatically reduce its funds leaving it almost penniless.

The anti-Europe party was accused of taking "impermissible" donations from Alan Bown, a British businessman, between December 2004 and January 2006, while Mr Brown was absent from the electoral register.

The Electoral Commission said yesterday that it would apply to court for the forfeiture of the donations, totalling £363,697, and that the party would also face fines up to £1,500 for filing accounts "unacceptably" late.

John Whittaker, the UKIP chairman, said the law was designed to stop parties receiving funding from overseas sources and that they were being penalised for a simple mistake rather than a deliberate attempt to break the law.

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He said: “Mr Bown was entitled to be on the electoral register throughout the period in question, and has been a permanent resident and taxpayer in the UK all his working life.

"It's the law and we accept that, but it was an honest mistake. You have to affirm every year to remain on the register. He doesn't remember whether he filled in the form or not.

"Sure, the electoral commission is there to operate the law, but I think they could have brought a bit of common sense to this."

When asked on BBC Radio 4's Today programme if the action could leave the party broke, Mr Whittaker said: "Well sure. Our party's finances are in extremely sound condition, unlike the other major parties at the moment.

"We have a few thousand in the bank, but a few thousand is rather smaller than £360,000."

Action will be taken under the 2000 Political Parties, Elections and Referendums Act, which forbids taking money from people or organisations not registered in the UK. Under the Act parties have up to 30 days from the date the donation was received to return the money.

The Electoral Commission, which has the power to impose civil penalties for late filing of accounts, said it was also launching a review of UKIP's “systems for dealing with its financial affairs and meeting statutory reporting requirements”.

The party will be fined £1,000 for filing its 2005 annual accounts almost six months after an extended deadline and its South East branch will be charged a further £500 for presenting its accounts more than six months late.

In a separate move, the Electoral Commission said it was also preparing to take legal action against the Socialist Labour Party over donations up to £5,090.

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