The Government should not stop British overseas territories acting as tax havens because it would destroy their livelihoods, a senior Conservative MP has argued.

Dominic Grieve, the former attorney general and chair of an influential parliamentary committee, conceded the British Government could choose to enact legislation to stop some activities that drained tax from the UK.

He however said places like the British Virgin Islands – which is under UK sovereignty – were “entitled” to run their financial services sectors as they pleased.

The British Virgin Islands are a noted tax haven, despite being under UK sovereignty (Creative Commons)

“If we’re going to destroy the economy of the British Virgin Islands because we prevent them from providing banking services at all then we’re going to destroy the livelihood of its inhabitants,” he told BBC Radio 4’s Today programme.

“For those reasons I think the Government has a responsibility towards encouraging overseas territories to find legitimate ways of economic development and the financial sector is undoubtedly such a legitimate method – just as it has been for Switzerland or any others.

“We need to consider carefully the consequences of [doing that]. If we were to follow the suggestion that we should effectively remove the autonomy of overseas territories to run their lawful financial services I don’t think we are acting properly towards them. They are entitled to make their own decisions in this.”

He also argued that it was inevitable in human society that the wealthy would attempt to move their profits to low-tax jurisdictions.

Labour Party leader Jeremy Corbyn has however said that the Government should “stop pussyfooting around" on tax dodging.

Last month a report by the charity Oxfam estimated that the UK Treasury loses £5 billion a year to tax havens.

The row comes after massive data leak from Panama-based law firm Mossack Fonseca which shows it registered more than 100,000 secret firms to the British Virgin Islands.

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Britain provides defense and foreign affairs support for British Overseas Territories, which not independent, retain the Queen as head of state, but are governed autonomously.

The territories, which include the Cayman Islands, the British Virgin Islands, Anguilla, and Bermuda, are governed by the British Overseas Territories Act 2002.