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LONDON (Reuters) - Britain should cultivate allies and use its clout to stop a tax on financial transactions in 11 European Union countries from harming the City of London, a panel of UK lawmakers said.
The committee from the House of Lords (upper house) also said in a report on Tuesday the planned tax on derivative, bond and share trades was flawed and would undermine the EU single market.
"The government should be more closely involved in defending the single market. They don't find allies and there is a real and present danger to the City of London, Europe's most important financial centre," the committee's chairman, Lyndon Harrison, told Reuters.
The tax is aimed at clawing back money from banks after the taxpayer money their received in the 2007-09 financial crisis.
Eleven EU countries, but not Britain, have agreed to push ahead with a tax and will meet on Thursday amid a growing legal battle over the plan's legality.
Banks in London are worried that although Britain won't be part of the tax, securities trading in the bloc's biggest market will be disrupted in unforeseen and damaging ways.
Harrison said Britain cannot simply sit back, though he welcomed the UK's legal challenge to the tax in the EU's highest court in a case which could take some time.
"Instead of wielding the considerable strength that we have as the premium financial centre, we are reluctant. Our colleagues in Europe want us to be in, commenting and cajoling to demonstrate our faith in the single market," Harrison said.
The report calls on the EU to explain how the tax will be collected in countries not taking part.
The plan risks driving transactions offshore and there was no realistic incentive that could be paid to Hong Kong, Singapore or New York to collect the tax, the report said.
Few believe the tax will be implemented as currently proposed given pressure from France and others for a less ambitious stamp duty on shares limited to where the securities are issued.
Legal counsel for member states have already said that one core element breaks EU and international law.
This refers to levying the tax anywhere in the world, its so-called extraterritorial effect, if one side of a trade is "established" in one of the 11 participating countries.
Last week Reuters reported that lawyers at the European Commission have rebutted these accusations in a new legal opinion.
Reporting by Huw Jones; editing by David Evans