Threat of EU sanctions for Britain.

The European Union (EU) is threatening sanctions if the UK follows through with plans to cut tax and deregulate some industries, thereby undercutting the bloc's economy, according to a leaked strategy paper.

Unprecedented safeguards such as "tax blacklists" penalties against state-subsidised companies could be used by the EU in in efforts to preserve a "level-playing field" and minimise the "clear risks" of such measures, a presentation to EU27 member states seen by the FT reveals.

The slides describe the UK economy as too big and too close to enable normal trade partner relations, and the EU therefore wants to define new ways to enforce restrictions on taxation, state aid, environmental standards and employment rights.

EU negotiators said any deal on post-Brexit relations had to "cater to the specificities" of the relationship — implying the "depth and breadth" of relations warrants tighter controls than those seen in the bloc's relations with the US, Japan or Canada.

Noting such strict curbs do not feature in standard trade deals, the EU paper argues innovative mechanisms will be needed to keep the UK in check, either through conditions in a trade agreement or separate retaliatory measures.

"International rules do not adequately address the [potential] distortive effects of subsidies on investment, trade and competition," the paper stated "The EU-UK agreement will have to include robust provisions on state aid to ensure a level-playing field."

While UK negotiators will have expected the EU to take a hard stance against "unfair" competition, officials said the EU would need to allow for "special" levels of trade access to justify such "special" restraints on the UK.

The presentations added that the UK is "likely to use tax to gain competitiveness" and is already a low-tax economy with a "large number of offshore entities", but acknowledges the bloc has "very limited legal/political restrictions to prevent this".

Outlining their approach to ensure tax standards are upheld, the EU negotiators call for "binding requirements" on anti-tax avoidance measures, information sharing and transparency.

Should the UK refuse to accept such agreements, the EU warns it "has its unilateral listing process for uncooperative tax jurisdictions".

Dr. Ray NultyComment