In the UK, corporation tax is currently at 20 per cent and is due to fall by 17 per cent by 2020. Ms May suggested Britain may lower corporate tax further to retain talent and attract more companies to Britain.
However, Allan Monks, an economist at JP Morgan, said the Government’s plan will not offset the shock of a hard Brexit, according to a note seen by Business Insider.
“Even economically, lower corporation tax would not come close to offsetting the shock of a very hard Brexit,” Mr Monks wrote.
“The UK’s corporate tax regime already looks competitive both historically and internationally, further cuts are likely to prove more costly to the chancellor than before, and the tax rate would, in theory, need to turn negative to combat the shock of an ultra-hard Brexit,” he added.
His warning comes as Andreas Dombret, a Bundesbank executive board member, warned UK-based banks not to come up with schemes to get around regulations as they seek ways of preserving their access to the EU market after Brexit.
“Given how the Brexit debate developed early this year, this warning is not at all an empty one,” Mr Dombret said. “A financial-center strategy comprised, among other ingredients, of very low corporate taxes and lax regulation has already been mentioned in the UK as a fall-back option for London.”
Ms May’s hard Brexit will almost certainly result in the loss of crucial passporting rights, which allow financial firms to sell their services freely across the rest of the EU.
Financial firms are the biggest tax contributor of any sector to Government coffers.