Mr Etheridge, who is bidding to succeed Nigel Farage as party leader, described full face veils as 'a security risk' and said they should be banned from being worn in public.
The hot favourite for the top job missed the nominations deadline on Sunday. He has also admitted that he forgot to declare a drink-driving ban when seeking election as a police and crime commissioner in 2012.
A Ukip spokesman said: "By a clear majority of NEC members, Steven Woolfe MEP's application was considered to be ineligible as a result of a late submission and as such he did not meet the eligibility criteria. His membership of the party was not in question."
Meanwhile West Midlands MEP Mr Etheridge ramped up his campaign to be leader.
Speaking during a debate with three other leadership candidates, he said: "I don't mind what people do for their cultural values or for their religious values.
"That's one of the great freedoms of our country.
"We are in a severe security situation, and if you are in a public place that is security sensitive, I'm afraid you have got to show your face. That means any face covering."
His view was backed by fellow candidate Lisa Duffy, who called for a blanket ban on the wearing of burqas.
Mr Etheridge, who is also a Dudley councillor, said that as a party UKIP was needed 'more than ever' in the wake of Brexit.
"Leaving the EU was opening the door so we could make some serious radical changes to our country," he said. "We've got to get rid of the over-powering state, too many rules and regulations...too much taxation, frankly.
"Let's start giving people some more freedom. The freedom to start keeping their own money in their pockets."
He added: "The kind of innovations that we can now bring into play on security and the economy, can make our country a better and safer place.
"UKIP can be the voice of the people against the tired old establishment that has kept them down for so long. This is our time to really represent the people."
During Mr Etheridge's campaign - dubbed 'Billieve in Bill' - he has called for a referendum on the death penalty and tough prison reforms, which include charging criminals £40,000 a year to stay behind bars.
A crowdsourcing page to raise funds for his campaign currently stands at £8.
In total six candidates have declared to stand in the UKIP leadership race.
They include Mrs Duffy, who has the backing of a number of senior figures, including Suzanne Evans, and is seen as someone who could modernise the party.
Other nominees are Staffordshire educated Liz Jones, North East MEP Jonathan Arnott and Phillip Broughton.