The United States has warned Britain that if it proceeds with a so-called digital tax on the likes of Amazon and Google, the country can kiss goodbye to a free trade deal, The Daily Telegraph reported on Saturday.
The newspaper said the threat has been communicated to the UK government "at multiple levels."
Liam Fox, Britain's former international trade secretary, was reminded just last month that the trade deal was conditional on the withdrawal of the digital tax, the paper added.
A wide-reaching trade deal with the world's largest economy is a key plank of Prime Minister Boris Johnson's post-Brexit vision for Britain.
Trade deal vital to UK growth
Johnson's government has promised that a speedy agreement with Washington would give the UK economy a significant shot in the arm, shortly after the country leaves the European Union on October 31.
Critics, however, have warned that a US-UK deal will not offset the expected loss of trade with the 27 remaining members of the EU, Britain's biggest trading partner. Many supporters of Britain's National Health Service (NHS) also fear it could be sold off to US medical giants as part of the deal.
Britain's digital services tax was first announced last year in response to widespread public anger over how tech giants are able to circumvent domestic tax rules, and in many cases, pay virtually no tax on revenues generated in the country.
The new legislation is due to come into effect from April next year, which will see Facebook, YouTube, eBay and others attract a 2% levy. The tax is expected to raise an extra 275 million pounds (€300 million, $334 million) in its first year.
Paris pressured too
France is also facing Washington's ire over its plans for a similar tax on tech giants, although the EU shelved plans to levy a bloc-wide tax earlier this year.
The Telegraph warned the proposed tax is seen by US President Donald Trump as a "tax grab" on American companies, who dominate the global tech sector.
Trump and Johnson, who became British Prime Minister 10 days ago, had agreed to start trade negotiations as soon as possible.
The ultimatum gives an indication of the troubles Britain could face negotiating future trade deals alone. During the past 45 years of the country's EU membership, most trade negotiations have been conducted by Brussels.
The warning is another major setback for Johnson, who has vowed to renegotiate the country's terms for leaving the bloc even though the EU has repeatedly refused to reopen the withdrawal agreement that was negotiated with the government of his predecessor, Theresa May.
Brexit watchers say the odds of Britain crashing out of the EU without a deal are increasing every day.