Ukip and millionaire Labour donor John Mills are facing an investigation by the Electoral Commission over an £18,500 cheque he made out to the eurosceptic party during the Brexit campaign.
JML founder Mills, who ran Labour's Leave campaign, which was backed by the likes of Vauxhall MP Kate Hoey, handed over the cash to Ukip as a contribution to cross-party events ahead of the referendum.
However, the election watchdog has now confirmed it will investigate both sides over discrepancies in the way that funding was reported to the authorities.
A spokesman for Mills said: "During the EU referendum campaign, Labour Leave co-organised events with other groups in favour of Brexit. These were cross-party events and included representatives from Labour, the Conservatives and Ukip, as well as non-partisan organisations.
"We sought clarity from the Electoral Commission to ensure we were compliant, and they advised us to pay our share of the cost in the form of a donation. This one-off payment to Ukip was solely our share of this cost. The figure covered the cost of venue hire, transport, accommodation and security for the events."
A Ukip spokesman said the party had already responded to enquiries from the Electoral Commission.
"We did do some joint activity with Labour Leave which included a 'donation' from them to Ukip to cover part of the cost," they added.
The news comes following a complaint by Seb Dance, Labour MEP for London, who also complained directly to the Labour party over the donation, claiming the JML chief broke party rules by supporting a rival party.
Speaking today, Dance said: “Whatever the outcome, I believe everyone in the Labour Party should condemn Ukip’s values, not condone them. No Labour Party member should campaign with Ukip, and they certainly should never donate to them.”