Britain has lost control of its ability to set corporation tax, a think tank has claimed.

Despite government claims that tax is a red line issue in the EU constitution talks, the Centre for Policy Studies said key powers have already been lost to Brussels.

The cost of the shift could be as much as £8 billion year to the Treasury, said the study.

The think tank argued that although the UK retains the right to initiate tax law, the European Court of Justice (ECJ) has developed the power to strike down laws which it considers to be discriminatory under single market legislation.

It concluded that a major casualty of this is corporate tax where firms with overseas subsidiaries have fought for significant tax rebates at the ECJ.

"The impact on revenues is significant. Corporation tax raises £30 billion a year in the UK," said the report's author Alistair Craig.

"It is estimated that the cost of those cases that are currently going through the courts is in the region of £10 billion.

"If all the other potentially affected provisions of corporate tax law are also struck down, the loss to the UK exchequer could be a further £8 billion annually."

The think tank claimed the government had failed to admit to the scale of the problem it faces and was responding to court verdicts through ad hoc legislation.

It called on ministers to enter into discussions with business and industry to decide how to tackle the litigation currently before the courts.

As a last resort, the think tank warned that leaving the EU could be an option.

"This would clearly be a massive step, with political and economic implications far beyond just tax," said Craig.

"The question is whether the broader benefits conferred by EU membership outweigh the disadvantages, which of course include the effect EU law is currently having on our tax system.

"It would be preferable to find an option which did not involve such upheaval across all of Britain's international relationships and obligations.

"But, as with any problem or crisis involving Britain's dealings with her fellow member states and the EU bodies, the option is always there if required."