The Government has warned that the ‘Amazon tax’ on online revenue proposed by retail bosses would be illegal under EU law.

A tax for online sales, which has been championed by retail leaders including Sir John Timpson, Dave Lewis and Mike Ashley to level the playing field between online and bricks-and-mortar retail, would reportedly breach EU state aid legislation.

The Times reports that the Treasury’s financial secretary Mel Stride said in a letter to the chair of the Commons Treasury select committee, Nicky Morgan: “The government considers there is a high risk that such a tax would be found to be state aid.”

The UK is set to leave the EU on March 29 but under the current draft agreement, Britain has agreed to “dynamic alignment” with Brussels on state aid rules, which would prohibit implementing a sales tax on online retailers.

In a bid to increase the tax contribution to the UK economy by digital giants such as Google and Amazon, chancellor Philip Hammond unveiled a digital tax in the Budget in October.

The planned digital tax, which will come into effect in April 2020, will impact online businesses that generate more than £500m in global revenue and is expected to raise £1.5bn over four years.