Well connected: Levy, an accountant, is a close confidant of Tony Blair

Blair tycoon paid just £5,000 tax

THE millionaire businessman credited with turning round the Labour party's finances by raising up to £7m ahead of the last general election paid just £5,000 in taxes to the Inland Revenue last year.

Lord Levy, 55, a former music business mogul and close confidant of the prime minister, sought but failed on Friday to obtain a gagging order preventing The Sunday Times from publishing this and other details of his tax affairs.

In a midnight hearing, the High Court ruled in the newspaper's favour, saying there was a clear public interest in revealing the Labour peer's tax secrets because of the way his party had repeatedly condemned tax avoidance schemes while in opposition.

"He who actively involves himself in public life, as Lord Levy has, cannot altogether complain if he is caught by the heat," said Mr Justice Toulson in a ground-breaking ruling.

Lord Levy, the former accountant ennobled [made a Lord] by Tony Blair in 1997 in recognition of his work in raising money for the party, consolidated his fortune in the late 1980s when he sold his recording business, Magnet Records, for an estimated £10m. He then founded a second recording company, M&G Records, which sold in 1997 for an undisclosed sum.

Levy has now been appointed by Blair as his "personal envoy" to the Middle East.

Information passed to The Sunday Times last week reveals that Levy was a basic-rate taxpayer who paid about the same to the Inland Revenue in the 1998/99 financial year as someone earning the national average salary of £21,000.

The leak came in the wake of a story in last week's paper which revealed how foreign-born Labour donors are cutting their tax bills by exploiting a £10 billion loophole through which they can claim not to be domiciled in the UK for tax purposes despite having lived and voted here for decades.

Levy's tiny tax bill will surprise his wide circle of friends and business associates, who include Ehud Barak, the Israeli prime minister, [right], and Bernie Ecclestone, the Formula 1 racing tycoon.

They know Levy as a self-made millionaire who drives a Bentley, lives in a palatial London home complete with swimming pool and palm trees, and who boasts of having brought the pop-stars Chris Rea and Alvin Stardust to fame.

The tax bill would also appear to place a question mark over how much of Levy's wealth, if any, is held in the sort of tax avoidance schemes that Labour colleagues criticised so vehemently before winning office in 1997.

Mike Warburton, senior tax partner with accountants Grant Thornton, said: "People with this much wealth often invest with people like me to avoid tax but to get it down to the basic rate is quite extraordinary.

"It is possible but would involve extremely careful and sophisticated planning."

The leaked information on Levy's affairs shows that he faced a total personal UK tax bill of just over £5,000 for the 1998/99 financial year - the last year for which he, and most other people, have completed a tax return. His taxable income was less than £20,000.

Levy, who started his career as an accountant, had no capital gains in the year in question. Only modest income from shares and other investments, including interest of about £150 from an account in Israel, is said to have been included on his tax return.

This is odd, say accountants, because Levy is known to be a man of substantial means whose capital would normally be expected to produce a large annual return.

In Levy's case, no such income is apparent, raising the question: what has he done with his money? "It is a mystery. He must either have the money under his mattress or it is tied up in investments that do not produce any income, or it is held in some sort of trust," said one leading tax consultant last week.

There is no suggestion that Levy has done anything illegal or improper to avoid tax and his lawyers explained his low tax bill on Friday on the grounds that he was not "gainfully employed" during the year in question.

They added that he was "living on capital" and denied that he had any offshore holdings, other than a "small bank account" and second home in Israel.

Levy had attempted to gag The Sunday Times with an injunction on the grounds that his tax affairs were confidential. However, The Sunday Times successfully argued that his position as a Labour peer and his close ties with a government that before the last election had pledged to stamp out tax avoidance meant that it was in the public interest for the facts to come out.

"If the individual had nothing to do with the Labour party I would have inclined to the view that the right to confidentiality should prevail," said Mr Justice Toulson.

"But if the individual has allied himself to the party to the extent of taking a peerage and taking the Labour whip then I do see force in the point that his own conduct is a matter of legitimate public reporting."

Before the election the then shadow chancellor, Gordon Brown, criticised tax avoidance loopholes generally. At the Labour party conference in 1994 he branded those who use such schemes as the "some thing for nothing elite" and the "undeserving rich". Labour went on to pledge that it would "take action against the tax abuses and avoidance on the part of a few which result in higher demands on the overwhelming majority".

It said it was "indefensible that a very wealthy few are allowed to work or live in the UK without making a fair contribution through taxation".

Levy is known to have used offshore trusts in the past and his companies had links with one or more tax havens until 1997. But at around the time of the general election he moved the Michael Levy Acquisitions Trust, an offshore trust based in Guernsey, back to the UK.

It was also reported that a second offshore trust - The Rothschild Trust in Guernsey, which held the shares of his principal company, Wireart - was altered at about the same time, with Levy and his wife, Gilda, taking over as trustees.

With his acute business sense, Levy is best known within Labour as the mastermind behind the party's high-value donation unit. Before the election he was assigned responsibility for the "blind trust" that funded Blair's private office, and secured donations from dozens of leading businessmen, including Lord Puttnam, the film producer.

The life-long Labour supporter also secured a £1m donation from Ecclestone, which the party was famously forced to repay when it was revealed in November 1997 that Labour had been pushing the EU for an extension to tobacco advertising in Formula One.

Levy, who is domiciled in the United Kingdom for tax purposes, was born in Hackney, East London. He and his wife live in a multi-million-pound mansion in Mill Hill, north London, and count Blair among their dinner guests. He is also patron or chairman of numerous charities. Levy and Blair, former tennis partners, first met in 1994 at a dinner party, where they were introduced by a senior Israeli diplomat.

Last night Levy issued a statement explaining why he had paid only £5,000 in tax for 1998/99: "I devoted that period to political and voluntary activities, none of which provided any income for me. I was living off my own savings on which all tax owing had been paid."

He denied he employed a highly sophisticated tax avoidance strategy involving offshore holdings: "There is no such strategy and there are no such holdings."

Levy claims he sought the injunction because this newspaper had obtained his tax details "unlawfully". In fact, he sought the injunction on grounds of breach of confidence and the tax information was presented to the paper by a third party.

Insight: Paul Nuki, Gareth Walsh, David Leppard and Humfrey Hunter