LABOUR failed to declare a front page advert taken out in a Croydon newspaper in last year's election expenses.
The Electoral Commission has launched an investigation into why the four-page advertisement, placed in the Croydon Guardian six days before polls opened on May 22, was not included in the party's spending returns.
Breaching strict rules around election spending is an offence which could lead to a fine or criminal prosecution.
The advert, which could have cost around £2,000, is not listed among either the party's local or European election expenses filed with the Electoral Commission.
It is understood Labour took legal advice before deciding the advert, which was paid for by the London branch, should be listed as European rather than council election spending, even though it only appeared in Croydon and made no reference to its EU candidates. In any case, the expense was not registered in either.
Tim Pollard, leader of the Conservative group, said it was "clear" the advert was "aimed at influencing the local election".
It encompassed the front and back of the paper, as well as two inside pages, and featured the front page headline "Ed Miliband comes to Croydon" alongside a picture of the Labour leader at an event in the town.
It promoted some of the party's national policies and urged readers to "Vote Labour on Thursday 22 May".
On May 7, a week earlier, the Conservatives had spent £2,000 on an identically sized advert attacking Labour on supposed plans to raise council tax. It also spent £3,000 for a four-page pull out the following week.
Spending by political parties during election campaigns is monitored by the Electoral Commission.
During local authority elections parties must abide by spending limits set for each ward, which are set at £740 plus 6p per elector.
Ward specific spending, such as leaflets promoting specific candidates, are applied to the area in question, while general expenditure, such as administration and office costs, is shared across the borough as a whole.
The Conservatives accounted for the two adverts the party took out by dividing the bill between the 70 candidates who stood in Croydon.
The Advertiser viewed the spending returns at the Town Hall on Tuesday.
They show Labour spent £792.91 per candidate in Waddon, just £7.09 pence below the legal limit of £800.
Labour went on to narrowly win all three seats in the ward from the Conservatives, with just 121 votes separating the candidates in third and fourth, a victory which played a key role in party retaking control of the council for the first time since 2006.
Council leader Tony Newman declined to comment on the expense returns when contacted by the Advertiser.
Councillor Pollard added: "The advert was clearly aimed at influencing the local election so it should be included in the local election expenses.
"We rely on and trust the Electoral Commission to do their job and if they find there is a case to answer which, on the face of it, it looks as if there is, they should investigate and ensure that fair play happened.
"The reality is that spending limits exist for a reason and one would hate to think the natural course of democracy is distorted by one party spending more than they should have and getting away with it."
The Electoral Commission confirmed it was considering the matter in line with its enforcement policy. "We cannot comment further at this stage," a spokesperson said.
It has no powers to punish breaches of rules on candidate expenses and donations, but may refer a suspected breach for criminal investigation or seek prosecution.
A Labour spokesperson said: "This was an administrative issue which has now been referred to the Electoral Commission. It would be inappropriate to comment further at this stage."