Brexit: Government 'may have to slash corporation tax' to put pressure on EU in negotiations

Ministers are reportedly preparing tax reductions as part of plan to put pressure on the EU

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Government minsters could cut corporation tax by half if Brexit negotiations do not go as they hope, sources suggest.

The proposal to reduce the levy on big businesses from 20 per cent of profits to 10 per cent could be given the go-ahead if EU member states block a free trade deal with the UK or refuse to give British financial services companies access to the European market, according to the Sunday Times.

An unnamed source told the paper: “People say we have not got any cards. We have some quite good cards we can play if they start getting difficult with us. If they’re saying no passporting and high trade tariffs we can cut corporation tax to 10 per cent."

The UK already has one of the lowest corporation tax rates in the EU but ministers believe a further cut could help keep companies in the UK and attract new investment. Other EU states could fear losing business to the UK should Britain allow companies to keep more of the profits they create.

Labour condemned the suggestion of a further tax cut, saying previous reductions in corporation tax had been funded by slashing public spending.

John McDonnell, the Shadow Chancellor, said: “This is the last thing the Tories should be calling for after six years of failure to meet their own deficit targets and their under investment in our country, which has resulted in our economy being now so vulnerable to Brexit."

"The Chancellor should learn from the mistakes of his predecessor and not repeat them with more unfunded tax breaks as part of their shambolic Brexit plans."

Countries including Ireland and Singapore have credited a low tax rate with helping them attract new business. Ireland imposes a levy of 12.5 per cent while Singapore’s is 17 per cent.

The UK’s 20 per cent corporation tax rates compares to an EU average of 22 per cent. The tax rate is 29.72 per cent in Germany, 31.4 per cent in Italy and 33.3 per cent in France.

The plan to slash the levy could be used if EU member states refuse to grant “passporting rights” to British financial services that would allow them to continue operating freely across European markets.

It comes as EU member states appear unwilling to compromise on the conditions of Britain’s withdrawal, prompting ministers to consider other options should their demands not be met.

Theresa May was warned at her first European Council meeting as Prime Minister that Britain would not be able to dictate the terms of its exit from the EU. Mrs May also requested that the other 27 member states did not continue to exclude her from meetings, but was strongly rebuffed.

Former Chancellor George Osborne had previously floated the idea of cutting corporation tax to 15 per cent to reassure businesses worried about the impact of Brexit. He had already reduced the rate from 28 per cent to the current 20 per cent during his time in office.

A Treasury spokesperson would not comment on reports of a further cut but told The Independent: “As we have said before, we keep all taxes under review.”