Britain handed the EU the power to freeze UK companies out of its lucrative Galileo satellite navigation project, MPs have concluded, in a major embarrassment for Theresa May.

Under the planned Brexit transition deal – agreed by both parties – Brussels “merely have to notify the UK Government” that British firms cannot bid for contracts, in order to protect security, their report says.

The conclusion will leave ministers red-faced, after they vowed to fight the exclusion - and threatened to weaken Galileo by walking away entirely unless it was reversed.

Last month, the prime minister suggested the EU was acting beyond its powers, telling MPs: “As long as we are a member of the European Union, we will meet our obligations, but we should continue to be treated as a full member of the European Union.”

But the report, by the all-party European scrutiny committee, says Article 122 (7b) of last month’s draft exit deal allows the UK’s exclusion from programmes which “grant access to security related sensitive information”.

Furthermore, the relevant part of the text was “highlighted in green” – which meant it had been “agreed at negotiators' level”.

“To do so, the EU would merely have to notify the UK Government that it was exercising a derogation in the agreement,” said the scrutiny committee.

Ms May’s criticism centred on contracts expected to be awarded in June - before Britain leaves the EU in March next year.

But the MPs said the draft agreement allowed the exclusion now of UK companies from any work “which will involve delivery post-transition, as the legal basis for them to do so is not established”.

The exclusion would be from the Galileo’s sensitive “public regulated service” (PRS), an encrypted navigation system for government users to be accessed only by EU member states.

The biggest issues facing UK on leaving EU Show all 8 1 /8 The biggest issues facing UK on leaving EU The biggest issues facing UK on leaving EU Post-Brexit immigration workers sorting radishes on a production line at a farm in Norfolk. One possible post-Brexit immigration scheme could struggle to channel workers towards less attractive roles - while another may heighten the risk of labour exploitation, a new report warns. PA The biggest issues facing UK on leaving EU Customs union A key point in the negotiations remains Britain's access to, or withdrawal from, the EU customs union. Since the referendum there has been hot debate over the meaning of Brexit: would it entail a full withdrawal from the existing agreement, known as hard Brexit, or the soft version in which we would remain part of a common customs area for most goods, as Turkey does? No 10 has so far insisted that “Brexit means Brexit” and that Britain will be leaving the customs union, but may be inclined to change its position once the potential risks to the UK’s economic outlook become clearer. Alamy The biggest issues facing UK on leaving EU Northern Ireland-Irish border Though progress was made last year, there has still been no solid agreement on whether there should be a hard border between Northern Ireland and the Republic of Ireland. To ensure borderless travel on the island, the countries must be in regulatory alignment and therefore adhere to the same rules as the customs union. In December, the Conservative Party’s coalition partners, the DUP, refused a draft agreement that would place the UK/EU border in the Irish Sea due to its potential to undermine the union. May has promised that would not be the case and has suggested that a “specific solution” would need to be found. Getty The biggest issues facing UK on leaving EU Transition period Despite protests from a small number of Conservative MPs, the Government and the EU are largely in agreement that a transitional period is needed after Brexit. The talks, however, have reached an impasse. Though May has agreed that the UK will continue to contribute to the EU budget until 2021, the PM wants to be able to select which laws made during this time the UK will have to adhere to. Chief negotiator Michel Barnier has said the UK must adopt all of the laws passed during the transition, without any input from British ministers or MEPs. EPA The biggest issues facing UK on leaving EU Rights of EU citizens living the UK The Prime Minister has promised EU citizens already living in the UK the right to live and work here after Brexit, but the rights of those who arrive after Brexit day remains unclear. May insists that those who arrive during the transition period should not be allowed to stay, whereas the EU believe the cut-off point should be later. Getty The biggest issues facing UK on leaving EU Future trade agreement (with the EU) Despite this being a key issue in negotiations, the Government has yet to lay out exactly what it wants from a trade deal with the EU. Infighting within the Cabinet has prevented a solid position from being reached, with some MPs content that "no deal is better than a bad deal" while others rally behind single market access. The EU has already confirmed that access to the single market would be impossible without the UK remaining in the customs union. Getty The biggest issues facing UK on leaving EU Future trade agreements (internationally) The Government has already begun trying to woo foreign leaders into prospective trade agreements, with various high profile state visits to China, India and Canada for May, and the now infamous invitation to US President Donald Trump to visit London. However the UK cannot make trade agreements with another country while it is still a member of the EU, and the potential loss of trade with the world's major powers is a source of anxiety for the PM. The EU has said the UK cannot secure trade deals during the transition period. EPA The biggest issues facing UK on leaving EU Financial services Banks in the UK will be hit hard regardless of the Brexit outcome. The EU has refused to give British banks passporting rights to trade within the EU, dashing hopes of a special City deal. However according to new reports Germany has suggested allowing trade on the condition that the UK continues paying into the EU budget even after the transition period. Getty

Airbus has led protests that ending Britain’s participation in European space programmes will undermine security and defence across the continent.

"Maintaining and enhancing security and defence ties across Europe is vital for all citizens across the continent,” said Tom Enders, Airbus chief executive, last month.

“Irrespective of the UK's membership or not of the European Union, the UK is an important part of Europe.....and must play an integral role for our mutual security.”

The €10bn Galileo project is intended to be Europe's rival to the global positioning system (GPS), which will be developed and controlled by the United States.

Gavin Williamson, defence secretary, was said to have “hit the roof” over the EU’s stance on the project, which has received about 12 per cent of its funding from the UK.

Greg Clark, the business secretary, responded by threatening to walk away altogether – arguing that would increase Galileo’s costs and lead to lengthy delays.

The European scrutiny committee agreed, warning a UK pullout would “disrupt the rollout of the PRS service, cause further delays, and potentially have a detrimental impact on European security”.