The UK will suffer twice over from Merrill Lynch's investment woes, after a regulatory filing indicated that Britain will bear a large portion of its recent losses — in the form of lost tax revenue — at the same time as an internal memo warned staff that it had embarked on a hiring freeze across the group.

The brokerage, which is on a big cost-cutting drive after taking a hit of about $52 billion (£27.9 billion) from the credit crunch, has already cut more than 5,000 positions since the housing market collapsed.

About 400 of the job losses fell in the City and more positions will now be lost among its remaining 4,500 London staff as Merrill freezes previously-budgeted roles as well as replacement hirings across the group. Merrill's retail brokers, who comprise about 16,700 of the group's worldwide staff of 60,000, will be exempt from the freeze.

“As we focus on returning the firm to profitability, it is extremely important that we all manage expenses prudently,” said the memo, which was signed by Greg Fleming, president and chief operating officer, and Thomas Sanzone, chief administrative officer.

Meanwhile, a filing with the US Securities and Exchange Commission showed that the group is unlikely to pay corporation tax in the UK for decades after it charged $29 billion of its recent investment losses to Merrill Lynch International, its UK subsidiary.

Because of the way Merrill's accounts are structured, the group can offset a large portion of its writedowns against corporation tax in the UK, which is 28 per cent, compared with a top rate of 35 per cent in the US. This will reduce its British tax bill by about $8 billion and is likely to ensure that the group does not pay any UK taxes for at least 60 years. This estimate is based on the fact that Merrill Lynch International paid $130 million in corporation tax in 2006, a record year for the unit.

However the company pointed out that it has being paying taxes in the UK for years. Merrill is understood to have had the same tax structure in place for some time and this has not suddenly changed as a result of its recent losses.

Most of Wall Street's other losses are being booked in the US. Michael Bloomberg, the Mayor of New York, gave warning this week that “it will be a number of years before Wall Street starts paying taxes again. They will carry forward all of those losses”.

However, analysts said that although Merrill and Lehman Brothers are expected to record full-year losses and pay no taxes, Goldman Sachs and Morgan Stanley are on course to announce profits, and therefore to pay taxes.

The double blow to Britain emerged after Andrew Cuomo, New York's Attorney-General, said on Thursday that Merrill Lynch's offer last week to buy back about $10 billion of “auction rate” securities from its clients was insufficient. Mr Cuomo said that he planned to sue the group over its part in the sale of auction-rate securities.

Like Citigroup, UBS, Morgan Stanley and JPMorgan, Merrill stood accused of telling customers that the assets - which are typically sold in weekly or monthly auctions — were safe and almost as liquid as cash. However, the market has been virtually frozen since February, as investors became increasingly wary about buying all but the very safest forms of debt.

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