THE Tories are facing the threat of prosecution over allegations that they secretly banked a “soft” loan provided below bank rates in breach of electoral laws.

The party also received loans from other supporters who did not expect them to be repaid as they would be converted into donations — another potential breach of the law.

The disclosures come as police investigate allegations that both the Tories and Labour secretly borrowed money that was not provided on a commercial basis. Officials admit that the Conservatives have received up to 150 loans.

Legislation introduced in 2001 states that any loans not on commercial terms are deemed gifts and must be publicly declared to the Electoral Commission, the watchdog for party funding. Failure to make the necessary declarations is a criminal offence carrying a maximum prison sentence of one year or an unlimited fine.

Police launched their inquiry after The Sunday Times revealed in March that Labour had secretly taken loans from four businessmen who were then nominated for peerages by Downing Street.

After Labour complaints over the arrest of Lord Levy, its chief fundraiser, earlier this month, police were keen to point out that of the 48 people so far interviewed, more than half were Tories. If charges are now laid against the Tories, it is likely to increase pressure for similar action against Labour.

According to new evidence, a firm controlled by businessman Malcolm Scott, a treasurer for the Scottish Tories, loaned £200,000 to the Conservatives last year with interest paid at less than the Bank of England base rate.

Accounts for the firm, Philip Wilson Grain, show that it “made a non-trading loan of £200,000 which bears interest at base rate less one quarter of one per cent per annum and is repayable on 1 May 2010”.

The accounts do not disclose to whom the loan was made. However, after the cash for honours scandal broke, the Conservatives came under pressure to disclose the details of its financial backers and lenders.

In the party’s statement in March, it said it had received a donation of £210,000 from Philip Wilson Grain, which was reported as a gift that included money converted from a loan.

The Electoral Commission says the “overall test” that parties should use to determine whether a loan is commercial is the “extent to which similar terms would have been available at the time of the loan from a commercial lender”. Commercial unsecured loans being offered at the time by the main banks all had rates at least 1% above the base rate.

Lord Harris, a carpet millionaire worth £285m, converted a £200,000 loan into a donation which was declared by the party after the cash for peerages scandal became public. Harris is one of David Cameron’s biggest financial backers who was also a party treasurer ennobled under John Major.

Last week he said: “My loans are not really loans, they are donations and I just convert them.”

Parties are also advised that a loan should be declared if it is made “under the clear understanding that it may be converted into a donation at a later stage”.

Harris said that the loan had a rate of interest equal to the base rate which was “added to the loan”. Such a deal may not be regarded as commercial as it would not normally be offered by a bank.

Official party declarations do not reveal that Harris converted his loan to a donation after Cameron was elected leader last December — or a previous £525,000 loan, which may have been converted in 2001 before new disclosure laws were introduced. Harris’s £200,000 loan was disclosed as a donation only on March 31 this year after the Tories revealed details of all financial backers.

The party is understood to have been receiving loans for more than a decade and there is no suggestion that the lenders have broken any laws.

Yesterday a Tory spokesman declined to comment on the detail of individual loans but said: “There has been conflicting advice over the years as to what ‘commercial’ applies to; whether a loan has to be commercial just for the lender or for the borrower as well. One per cent below base rate is commercial for the lender: it’s more than he could get if he deposits it at the bank. The act refers to commercial terms, not rates.”

Explore UK News

• Crime News

• Education News

• Health News

• Science News

• Scotland News

Times Recommends

• Donor organ allowed child’s own heart to heal
• Michael Jackson: Not the final chapter
• Brüno toned down for 15 rating