Donations of more than £5 million to the Conservative Party from a company owned by Lord Michael Ashcroft, Watford FC's major shareholder, were today declared legal.

The Electoral Commission ruled that the donations by Bearwood Corporate Services were “legal and permissible”.

The decision came following a 14 month investigation into claims the company did not carry out any business in the UK.

Firms must operate in this country to be eligible to make donations to political parties.

It came as a group of MPs announced a hearing into the legitimacy of Lord Ashcroft's peerage, after he revealed this week he is a “non-dom” for tax purposes.

It has been claimed Lord Ashcroft, who owns 37 per cent of the Hornets’ parent company Watford Leisure Plc, had told former Conservative leader William Hague prior to his peerage in 2000 he would "take up permanent residence in the UK again" by the end of that year and immediately resign as Belize's permanent representative to the UN.

Lord Ashcroft resigned from his UN post a week later but in Monday's statement clarified that "permanent residence" was meant to say "a long term resident" of the UK, which the Government agreed to at the time.

Non-domiciled individuals have residence in the UK but also have strong affiliation with another country and have different taxation laws.

Lord Ashcroft spends a lot of his time in Belize, where he spent time growing up as a child and has business interests, and also in Florida.

In his statement, Lord Ashcroft said: “I have been declaring all my UK income to HM Revenue.

“My precise tax status therefore is that of a “non-dom". Two of Labour's biggest donors - Lord Paul (recently made a privy councillor by the Prime Minister) and Sir Ronald Cohen, both long-term residents of the UK, are also "non-doms".

“As for the future, while the non-dom status will continue for many people in business or public life, [Conservative leader] David Cameron has said that anyone sitting in the legislature - Lords or Commons - must be treated as resident and domiciled in the UK for tax purposes. I agree with this change and expect to be sitting in the House of Lords for many years to come.”

Lord Ashcroft has donated £5.1 million to the Conservative Party in recent years, which has been used to fund campaigns in marginal constituencies.

In December, he loaned the Hornets £4.9 million to ensure the Vicarage Road club avoided administration, and he is also set to underwrite a future £7.5 million rights issue.