THE Scottish Executive's relationship with millionaire businessmen is under fire, after it emerged that public money has been poured into a charity set up by a tax exile.

Officials gave £500,000 to a group set up by Monaco-based Lord Laidlaw, and even paid the salary of his chief executive - the wife of Scotland's most senior civil servant.

The hand-outs row comes amid continuing controversy over the tycoon's role in British public life. Laidlaw, a Scot, became a Tory peer in 2004 after agreeing to become a tax resident in the UK. However, it was recently revealed that the businessman - who has lent and donated around £6 million to the Conservative Party - had reneged on his part of the deal by remaining in Monaco.

The outcry over his failure to end his tax exile status was compounded by remarks made by Tory leader David Cameron, who said: "Lord Laidlaw made some undertakings to the House of Lords appointments commission. He must honour those undertakings. I am very clear about that."

Laidlaw said he intended to become a UK taxpayer but had "a variety of personal reasons" for not fulfilling his promise. However, the row has spread north after it emerged the outgoing Scottish Executive gave six-figure subsidies to Laidlaw's charity. Education department officials have given the Laidlaw Youth Project (LYP) £500,000 since 2004.

LYP, which Laidlaw set up in 2003, distributes funds to organisations that help children and young people. It was launched jointly with former first minister Jack McConnell, who gave the charity his blessing.

More controversially, the Executive has paid the salary of the LYP's chief executive, Maureen McGinn, despite the Tory donor having an estimated personal fortune of £600 million.

Documents confirm that £73,586 was paid out to meet the "staff costs" of hiring McGinn, who happens to be the wife of Scottish Executive permanent secretary John Elvidge.

She was "seconded" by the charity, which is now called the Laidlaw Youth Trust, and subsequently appointed to the post full-time.

The revelations have prompted critics to ask why the outgoing Executive was funding a charity run by a tax exile.

Questions are also being asked about why, given Laidlaw's vast wealth, Scottish taxpayers were footing the bill for the charity's executive. Laidlaw's tax status, critics say, has allowed him to enhance his fortune and live a lifestyle out of the reach of most UK taxpayers.

The Scot was at one point reported to own five yachts, several expensive cars, as well as homes in Monaco, Florida, France and London.

Laidlaw's relationship with the Executive has always raised suspicions among opponents who do not want millionaires calling the shots on education policy.

Left-wingers are also queasy about public services being influenced by a peer who has funded the Tory party for many years.

For instance, former Conservative leader William Hague borrowed Laidlaw's private jet and used his helicopter during the general election.

The businessman has also bankrolled the Scottish Tories with several high-profile donations, as well as allowing the party use of office space in Edinburgh. He is said to have a made a substantial donation to the party's recent Holyrood election campaign.

But Laidlaw's failure to end his tax exile status may prove costly. The Lords appointments commission is reportedly demanding the peer backdates his tax residency to April 2004, the point at which he originally agreed to become a UK taxpayer.

Laidlaw is said to have given assurances about his tax status and is understood to be in talks with the Inland Revenue about the matter. Backdated payments could hit the peer with a multi-million-pound tax bill.

The first minister, Alex Salmond, and his new government are now expected to face pressure not to make further payments to Laidlaw's charity until he becomes a UK tax resident.

SNP MSP Alex Neil criticised the outgoing Executive for funding the charity: "Given that a lot of charities are hard-pressed for money and funded by people who pay tax in this country, it is galling that one run by a tax exile is getting so much public money."

He added: "The parliament's audit committee should carry out an inquiry, and look at whether the rules should be changed. This sort of thing cannot go on."

Green MSP Patrick Harvie said: "The idea that Lord Laidlaw should sit in parliament passing laws over the rest of us while paying no tax here is utterly unacceptable.

"But if his actions bring funding for youthwork projects into question, he is risking even more damage as a result of this scandal. He must live up to his promises immediately and begin paying his fair share of tax."

A spokesman for the Scottish Executive defended the arrangement, saying: "The trust was set up to benefit children and young people in Scotland, not Mr Laidlaw personally. Indeed, Mr Laidlaw has added a considerable amount of his own money to the trust, and the Scottish Executive has a say over how the money is spent by the trust.

"Ms McGinn moved on secondment from the Executive to help set up the trust and her salary was paid by the Executive as per usual arrangements. The Executive stopped paying her salary when she left the organisation. Her employment at the trust is a matter for them."

A spokeswoman for the charity said she had "no comment" to make on the peer's tax status. Laidlaw could not be contacted last night.