A think-tank with close links to Gordon Brown will on Friday be criticised by the charity regulator following a 17-month investigation into allegations of political bias.

The Charity Commission report on the Smith Institute is expected to rebuke the think-tank, set up in memory of the late Labour leader John Smith, for straying too far from its educational remit into party political territory.

But the report will not be as damning as Labour feared and the Tories hoped, according to insiders.

For example, the watchdog is not expected to condemn explicitly the institute’s extensive use of Number 11 Downing Street to hold events. The charity last year stated it had used the chancellor’s official residence on 160 occasions since it was set up in 1997.

The think-tank’s contentious links to the prime minister include its employment of Ed Balls, the children’s secretary and one of Mr Brown’s closest allies, before his election to parliament in 2005. Wilf Stevenson, the institute’s director, is one of Mr Brown’s oldest friends.

The Tories have accused the institute of “nakedly partisan” literature and appearing to play an active role in supporting the Labour party. The opposition took particular exception to a seminar run by the think-tank in 2006 entitled “Cameron plagiarises Bush”, at which the Tory leader was criticised as an “empty opportunist”.

The commission said its decision to open a formal inquiry in February last year was “taken in the light of new information we have received which raises concerns about some of the charity’s work”. The scope of the investigation was to “determine whether the Smith Institute is both established and operating as a charity advancing the education of the public in the field of study and research into the economy”.

The institute has welcomed the inquiry and insisted it has not breached charitable law. Labour has dismissed the allegations as part of a “Tory smear campaign”, stating that Mr Brown has no formal or financial relationship with the think-tank.

Friday’s report will have repercussions outside Westminster, with think-tanks and campaigning bodies studying the commission’s detailed adjudication. Charitable status, which confers favourable tax treatment, imposes limits on overtly political activities – but those constraints remain a legal grey area.

Guidelines issued by the commission this spring acknowledged that contact with political parties was a “natural part” of some charities’ campaigning activity but warned: “Some caution is desirable.”