LABOUR party chiefs have “serious questions” to answer over the cash-for-peerages rumpus, says a Kent backbench MP.

Bob Marshall-Andrews, Labour MP for Medway, warned the party would be “badly damaged” if a wide-ranging inquiry into the allegations surrounding the loans did not investigate whether the Prime Minister himself knew what was going on.

His comments follow the arrest of Lord Levy, the Labour peer who is at the centre of allegations that peerages were offered to donors in return for making loans to the party.

Under rules on donations, loans do not have to be declared to the Electoral Commission, the party spending watchdog.

In an interview on BBC’s “Newsnight programme on Wednesday, Mr Marshall-Andrews said: “£14million was raised by the Labour party in 2005, not a penny of which was declared to either the Electoral Commission or the Labour party itself.

"You do not raise £14million and then not tell an association like the Labour party that you have not done it.”

“Why wasn’t the £14million declared? The only answer is that they [the loans] were pushed off into another accounting period. The whole point of loans is that you do not have to declare them, so there is a very serious question to answer.”

He went on to warn: “No organisation, no political party, raises £14million without the managing director,chief executive or leader knowing about it. If the inquiry does not go there, the Labour party will be badly damaged.”

He rubbished suggestions that the Metropolitan Police had only arrested Lord Levy to demonstrate the seriousness of its investigation and stressed: "It is extraordinary to claim that police officers are behaving like 10 Downing Street and are somehow addicted to spin.”