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Corporation tax cut ‘risks race to the bottom’

Britain risks initiating a “race to the bottom” with Ireland over corporation tax if it slashes its rate to 10 per cent to encourage companies to stay after Brexit, an MEP has warned.

The Sunday Times reported that senior advisers to Theresa May had drawn up plans to halve the UK’s corporation tax rate if EU negotiators blocked a free-trade deal or refused to give financial services companies access to the European market through so-called passporting.

The “nuclear option” could have potentially devastating consequences for the Irish economy, which has enjoyed huge success attracting investment with a 12.5 per cent rate.

Britain has a 20 per cent corporate tax rate but plans to reduce it to 15 per cent by 2020.

George Osborne, the former chancellor, announced the 5 per cent reduction in the aftermath of the EU referendum to show that Britain was “still open for business”.

Brian Hayes, a Fine Gael MEP, expressed concern that other countries could follow suit if Britain cut its rate further.

“It’s a threat; it’s real and we have to treat it as such. What we can’t have is a race to the bottom and the UK knows that better than anyone. I think what they said is that they’d only cut the rate if they are blocked from the single market and refused passporting rights, we have to remember that too,” he said.

He said that the proposal was most likely a bargaining chip that British negotiators would use to get the best possible trade deal in discussions with the EU. He said that Britain had to make up its mind on what it wanted from a deal with the EU, especially in terms of financial services companies’ ability to offer services to member states.

British businesses are able offer financial services to customers anywhere in the European Economic Area (EEA) — which includes non-EU member countries Iceland, Liechtenstein and Norway, as well as all EU member states — because of the passporting rights afforded to them within the EU. Those rights may be forfeited once Brexit is complete.

If Britain was to remain a member of the EEA, companies would be able to continue selling their goods into the European market.

“In order to get passporting, it would require the UK to sign up to all EU legislation, including the free movement of people. They have to understand that if they want passporting rights, they have to adopt the rules. They’re either in or they’re out,” Mr Hayes said.