Philip Hammond says Britain could slash taxes for business further to keep us competitive after Brexit

THE CHANCELLOR has threatened to unleash an all-out tax war on the EU if the bloc “wounds” Britain over Brexit.

In a stunning blast backed by No.10, Philip Hammond told EU leaders there was no way the British people would take punishment "lying down".

And he signalled the Government would slash corporation tax to poach companies from the EU if Brussels "closes off" Brexit Britain from the single market.

Mr Hammond said: “You can be sure we will do whatever we have to do.

"The British people are not going to lie down and say, too bad, we’ve been wounded. We will change our model and we will come back and we will be competitively engaged."

Last night Downing Street threw its weight behind the Chancellor ahead of Theresa May’s huge Brexit speech on Tuesday.

The PM is expected to confirm the UK is prepared to leave the single market and customs union so it can regain control of the border.

While admitting the possibility of a transitional period to adjust to the new terms,  aides said she will call for a ‘clean’ break.

And sources close to Foreign Secretary Boris Johnson said the Brexit backer "fully backed" the view that the UK will not lie down.

Labour leader Jeremy Corbyn said the PM was pursuing an “extremely risky” negotiating strategy which could clobber exports.

He said: “It seems to me a recipe for some kind of trade war with Europe in the future. That doesn’t really seem to me a very sensible way forward.”

Lib Dem Shadow Chancellor Susan Kramer said voters in Sunderland and Thanet would be “angry” their support for Brexit was being used to “push the agenda” of wealthy Tory supporters. She said: “The vote to leave wasn’t a green light to turn the UK into a place for the super rich to avoid paying taxes.

“The Chancellor’s plan would make Great Britain an outpost for dodgy deals and an outcast for the rest of the world.”

Mr Hammond – who backed Remain in the Referendum - was speaking to influential German newspaper Welt und Sonntag.

Insiders said his comments reflected a growing view that the Government will come out of the single market and then seek to negotiate a reciprocal tariff-free trade deal with the EU.

Experts believe there is no way Brussels will allow us to remain a member of the single market while ripping up free movement rules that allow unlimited EU migration.

In his interview, Mr Hammond insisted Britain has to have “overall control” of its borders – and that free movement "has to stop".

And he said that if anything Europe had moved further away from Britain since the Referendum – by pushing for closer political integration and an EU "defence component".

Asked by the Germans if Brits would "come to their senses" and decide not to leave, he replied: "This is not going to happen."

He was told the Government was attempting to “cherry pick” by seeking a good deal to protect the City and carmakers he countered that the EU faced the same charge in the way it struck trade deals.

The Chancellor said: "Is it cherry picking when South Korea does a trade deal with the European Union?
"We should be able to reach an agreement to allow, on a reciprocal basis, access to each other’s markets without the political integration that membership of the EU has come to imply."

The comments came just days after Bank of England Governor Mark Carney admitted the European economy faced a greater risk from Brexit.

Over the weekend it emerged the EU’s chief Brexit negotiator Michel Barnier had told MEPs the EU needs to retain access to the City of London.

Former Tory leader, Eurosceptic Iain Duncan Smith said: “Reality is mugging everybody.”

The Pound last night tumbled on foreign exchange markets  - falling 1.5 per cent to below US$1.20 at one stage - on ‘Hard Brexit’ concerns.  It marked the first time Sterling had moved below the $1.20 since the Tory conference in October.

Downing Street yesterday admitted Theresa May’s speech could cause a “market correction”.

In his interview, the Chancellor said if Britain was to leave the EU without an agreement on market access “we could suffer from economic damage, at least in the short term”.

He said: “We could be forced to change our economic model and we will have to change our model to regian competitiveness.”