The dreams of a Birmingham based disaster relief charity, Islamic Help, of establishing a 5,000 place boarding school for Muslim girls at Brierfield Mills in Pendle have been shattered by the Charity Commission.

The charity watchdog has ruled that Islamic Help was operating outside its charitable objects in raising money for a school.

In a hard hitting decision the Charity Commission has ordered donations to be returned to those who had responded to the appeal for funds. People thinking about donating were told £500 would go towards student accommodation; £5,000 towards a classroom and £20,000 towards a computer lab.

Pendle MP, Gordon Prentice, called in the Charity Commission, insisting Islamic Help was breaking charity law in asking for money for a purpose clearly outside its charitable objects.

Islamic Help bought Brierfield Mills, the Grade II listed former medical fabrics factory, in December 2009 for £1,020,000 plus VAT.

Sultan Niaz Ul Hassan, a trustee of Islamic Help and one of the new registered owners, told the Charity Commission than none of the money raised in the website appeal for funds for the Pendle Boarding School for Girls had been used for the purchase. Instead, the charity had secured a bank loan of £650,000 from Lloyds TSB and the balance apparently came from various pledges and backdated gift aid.

The Charity Commission is insisting that the £10,000 which Islamic Help says was raised in the fundraising appeal, must be returned to those who gave the money. Where this is not possible – because money was donated anonymously – it must go into a special pot and the approval of the Charity Commission must be given before it can be used for any another purpose.

The Charity Commission has also ordered Islamic Help to remove the appeal for funds for the Pendle School for Girls from its website.

Speaking from Barnoldswick earlier today, the MP said: "There was never any doubt in my mind that Islamic Help was operating on the wrong side of charity law. Fundraising for a huge school was way outside their charitable objects."

"Ghausia Girls’ School will not now be moving to Brierfield Mills and expanding to take 200 students "in the early stages" as some people were predicting."

"I am told Brierfield Mills will now be used as a warehouse for clothing collections and some parts could be leased at a commercial rent. There may be community facilities as well but, as always, I put aside the hype and I wait for the detailed plans."

"We have already had too much smoke and mirrors."

The MP added: "I shall be raising this issue in Parliament. I want to see a full audit of the finances of Islamic Help. And I want the Charity Commission to maintain an oversight and supervisory role."

"I am also left wondering what kind of assurances were given by the charity to Lloyds TSB (57% privately owned) to secure the £650,000 loan."