Monday, 24 October, 2016
Threat of UK tax cut staves off hostile EU
Tim Shipman, Bojan Pancevski and Jason Allardyce
Warning signs: Theresa May attended her first European Council meeting in Brussels last weekREX FEATURES
A secret plan to slash corporation tax by half has been hatched as a “nuclear option” to counter threats that Brussels will impose a “brutal Brexit” on Britain.
Under the plan the UK would cut the tax’s rate from 20% to 10% if Britain’s EU rivals blocked a free trade deal with the UK or refused to give financial services firms access to the European market.
Senior figures in Downing Street believe such a drastic move on business taxes would encourage firms to stay and make the UK a magnet for new companies, as Ireland and Singapore have become.
The plan has been floated by Theresa May’s closest advisers amid growing fears that the other 27 member states are taking an increasingly hard line against doing a deal that is in Britain’s interests.
The UK already has one of the lowest business tax rates in the EU, but those planning strategy on Brexit believe the threat of a further cut is a card that the UK can play.
It would be used to persuade the EU to grant “passporting” rights for the financial services industry to continue operating across the EU and carrying out transactions in euros.
A source familiar with the thinking said: “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%.”
May attended her first European Council meeting last week, where fellow leaders warned that Britain would have to pay a price for Brexit to deter others from leaving.
“The British did not take seriously our claim that we will simply not engage before they start the formal process, but I think now they have realised the reality of their position,” said a senior European source who will be involved in the negotiations.
“A failure to reach an agreement would lead to an uncontrolled exit that would damage the British economy, indeed a brutal Brexit — it would also have a negative impact on the EU.”
Some in Downing Street believe a big cut in corporation tax would give the European Commission and some companies pause for thought.
The EU has sought to bully Ireland into increasing its corporation tax from the 12.5% rate that has lured companies from other member states. The tax rate is 33.3% in France, 31.4% in Italy and 29.72% in Germany.
By contrast the rate is just 16.5% in Hong Kong and 17% in Singapore — both highly successful trading outposts.
A cut in corporation tax would be combined with an effort to ensure companies paid the lower rate in full. That might mean companies like Amazon came onshore.
May was given just five minutes to explain her position at 1am on Friday.
EU leaders set up a Brexit taskforce chaired by Didier Seeuws, a Belgian diplomat, to prepare the legal framework for Britain’s EU exit. One of the scenarios his team is working on is a “brutal Brexit” — a non-amicable separation under WTO rules.
Even David Davis, the Brexit minister, admitted in the Commons last week that falling back on WTO rules would send the UK economy off a “cliff edge”.
May is the first UK prime minister not to have bilateral meetings with key EU leaders during her first appearance at their gathering in Brussels.
Instead, May met her counterparts from three minor countries only: Estonia, Romania and Greece. The prime minister was also rebuffed by Donald Tusk, the European Council president, when she asked the leaders of the other 27 countries not to meet by themselves and devise policies that Britain would be expected to impose.
“What planet does she live on?” said a diplomat from a large southern country. “Even raising the issue of us meeting as 27 reveals how detached from reality the British have become. Tusk was very blunt when he told her that we will meet like that whenever we need to. The British are leaving, and will be treated accordingly.”
This week May will tell Nicola Sturgeon that she and not the Scottish leader will have the final say on a Brexit deal, when she meets the first ministers of Scotland, Wales and Northern Ireland.
The prime minister will ask Sturgeon, Carwyn Jones and Arlene Foster for their views but a Downing Street source said: “We will make clear that the UK government makes decisions on behalf of the whole country.”
May will also say that the government in London will not allow Scotland to have a second referendum on independence while Brexit talks are going on.
“She doesn’t think there is a need for a referendum and she doesn’t think the Scots think so either,” a No 10 source said.
The Scottish Conservatives’ constitutional spokesman Adam Tomkins said that another referendum could be delayed. He told The Sunday Times that the party would not block a second independence poll but that “a lot can be done to slow it down” as any referendum requires UK government consent.
A No 10 spokesman said no formal proposals had yet been put forward for a UK corporation tax cut: “There’s nothing like that being floated at this stage.”
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