The music mogul said he was concerned by the group's use of the British emblem, which they hung in their first practice room.
"My little Manchester mate, Debbie Turner, shared a practice space with this band that had a Union Jack on the wall," McGee told Uncut.
"I remember looking at the Union Jack and asking, 'Are they fascists?' and she said, 'Yes'. She was taking the piss, of course."
He continued: "It was a psychedelic Union Jack, sitting alongside pictures of John Lennon and Yoko Ono.
"But it was still a Union Jack – and back then, before the whole Cool Britannia b*****ks, a Union Jack meant you had to be right-wing. I truly didn't have a clue."
McGee signed Oasis to his Creation label in 1993 after watching one performance from the group at King Tut's Wah Wah Hut club in Glasgow.