George Osborne has written to Ed Miliband to ask for the Labour Party to return money donated by its biggest donor after being accused of avoiding tax.
On Thursday the Daily Telegraph claimed Labour helped a wealthy businessman bankrolling the party to avoid tax worth up to £1.5 million on a donation to its coffers.
John Mills told the paper that it was "tax efficient" to give the party shares, valued at £1.65 million in January, in his shopping channel company JML.
The former Labour councillor said making a donation in cash would have meant the Government took almost half.
Last month party leader 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 last night defended the unusual donation method, insisting it had been "declared in full" to a party funding watchdog and was in line with the rules.
Asked why he made the donations in shares, Mills told the Daily Telegraph: "To be honest with you, it is the most tax efficient way of doing this.
"Because, otherwise, you get no tax relief on donations to political parties for understandable reasons.If you donate to a political party out of a tax paid income, up until April it was 50% and now it is 45 (per cent).
"That means if it is £100,000, the Labour Party gets £55,000 and the Government gets £45,000."
According to the newspaper the idea of donating in shares came after discussions with the Labour Party.
He said: "It emerged...came out of a discussion I had with them about the best way of doing it.
"It is quite a good model (of donating). Labour has got people who deal with compliance and the legal side of all this. They are very sensitive nowadays."
The Daily Telegraph said accountants estimate that Mills is likely to have avoided nearly £1.5 million in tax on the value of the stock he gave to the party.
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."Suggest a correction