Ukip has removed the whip from MEP Janice Atkinson and axed her as a general election candidate "following allegations of a serious financial nature", the party said.
The Sun newspaper claims to have secretly filmed a member of Atkinson's staff "plotting to make a substantial bogus expenses claim" after a meal at a restaurant.
The paper says she was suspended after it secretly filmed a woman who worked for Atkinson asking a restaurant manager for a fake invoice for a party that Ukip held in Margate.
Atkinson previously apologised for calling a Thai woman a "ting tong"
The Sun article claims: "The party actually cost £950 to put on and the bill was paid by credit card by Atkinson’s chief of staff Christine Hewitt.
"But 24 hours later Hewitt, 53, went back to the restaurant to ask the manager to give her an invoice for a much higher sum so she could claim the larger amount back on expenses from the EU to boost UKIP coffers."
It is alleged that the staff member negotiated for and accepted an invoice for £3,150, made out to the newly-formed grouping of right-wing parties Alliance for Direct Democracy in Europe (ADDE) of which Ukip is the biggest member and its associated foundation The Initiative for Direct Democracy in Europe (IDDE).
The newspaper said the individual told the manager of the restaurant which hosted the event - and who had alerted the newspaper to the meeting to discuss the cost - that: "The idea is we overcharge them slightly because that's the way of repatriating (the money)."
The footage has been handed to Kent Police and the European Parliament.
Ukip leader Nigel Farage, asked about the allegations after an event in Kent, told The Telegraph: "If what she has been suspended for is right I am astonished she could have done something quite so stupid. I am very, very shocked and surprised.
"It looks like a claim that wasn't made, I am pleased to say, but a claim that was intended to be made that may not have been as genuine as perhaps it should have been.
"It would appear there was the intention to produce a receipt that may not have been genuine."
Atkinson represents the South East in the European Parliament and was due to fight the Folkestone and Hythe Commons seat on May 7. The party was quick to stress that the decision meant Atkinson was no longer its general election candidate in the seat - where Tory Damian Collins is defending a healthy majority of 10,122.
A party spokesman said it was "incredibly disappointed with Ms Atkinson, who appears to have exercised extremely poor judgment in acting in a way that the party has never and would never condone".
"The party has acted swiftly and immediately and, just as we showed when we suspended another MEP for financial irregularities, we always maintain a zero-tolerance attitude towards acts of this nature."
A European Parliament spokesman told The Sun: "The European Parliament has an obligation to refer any evidence which gives rise to the presumption of the existence of possible cases of fraud, corruption or any other illegal activity detrimental to the interests of the Communities to the EU anti-fraud office of OLAF."
Atkinson made the "ting tong" comments last year on the BBC's South East Today programme which aired at 6.30pm on 18 August.
The MEP was slammed for using the offensive language to describe Fa Munday, a food seller in Ramsgate, Kent. Munday's husband, Vincent Munday, described the language as "outrageous, rude and offensive".
The Mundays said "ting tong" meant that a person with mental illness in Thai. Atkinson then apologised for the comment.