On October 20, 1994 The Guardian, a noted left-leaning publication, published an article claiming that Hamilton, and another minister Tim Smith had received money from the Harrods owner Mohamed Al-Fayed for asking questions on his behalf in the House of Commons. The subsequent furore became known as the "Cash-for-questions affair". Tim Smith admitted his guilt and resigned immediately. Neil Hamilton claimed innocence but was eventually forced to resign his position as Corporate Affairs Minister.
During the election of 1997, Hamilton, still claiming his innocence of any wrong-doing, was determined to hold onto his parliamentary seat in what was then one of the safest Conservative constituencies in the country. Conservative Central Office said that selection of candidates was a purely a matter for the local party and refused to intervene. The well-known BBC war correspondent Martin Bell was persuaded to stand as an independent candidate. Martin Bell won the seat with a majority of over 11,000 votes, after the Labour and Liberal Democrat candidates stood down to give him a clear run at Hamilton's seat. The media coverage surrounding Neil Hamilton and his refusal to stand aside, along with other allegations of sleaze levelled at the party, severely de-railed the Conservative's election campaign and contributed to the worst defeat the Conservative party had suffered for 150 years.
Hamilton took Mohamed Al-Fayed to court for libel in 1999, but he lost the trial and the subsequent appeal. In 2001, unable to pay legal fees and costs amounting to some £3m, he was declared a bankrupt. He still has supporters who believe him to have been unfairly treated by the "left-leaning media".
In May 2001 Neil and Christine Hamilton were arrested by police investigating an alleged rape, with an inevitable blaze of publicity. The investigation against them was dropped in August of that year. In June 2003 their accuser, Nadine Milroy-Sloane, was jailed for attempting to pervert the course of justice.