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A senior UK minister said on Monday there was “a strong case” for tough new action against Beijing, as cabinet tensions over how to deal with China following a spying scandal at Westminster broke into the open.

Cabinet Office minister Oliver Dowden said ministers were looking at whether to include China in an “enhanced tier” of countries under the government’s new National Security Act, intended to “protect the safety or interests” of the UK.

Such a move could require anyone working in the UK “at the direction” of China — potentially covering thousands of people including those employed by Chinese companies — to register with the British authorities or face jail.

The Metropolitan Police has confirmed that two men were arrested in March under the Official Secrets Act over allegations of espionage-related offences.

One of the men — who is in 20s — worked as a parliamentary researcher at Westminster and was arrested on suspicion of spying for China, according to people familiar with the situation.

The Treasury is concerned about any government moves against China that could damage the UK economy and Rishi Sunak has resisted pressure from Conservative MPs to label Beijing “a threat”.

Business secretary Kemi Badenoch said politicians should not use language that “makes people scared”, while chancellor Jeremy Hunt stated Britain should carry on talking to China.

Dowden’s comments appeared to align him with home secretary Suella Braverman and security minister Tom Tugendhat in pressing for China to be subject to tougher controls under the National Security Act.

“We are currently reviewing which countries are in the enhanced tier,” Dowden told MPs, adding there was “a strong case” for including China.

An ally of Dowden said no decisions had been taken but that ministers had already been very robust in taking action to defend Britain’s interests.

The prime minister told the Commons that MPs were “rightly appalled” by media reports “of espionage in this building”.

“The sanctity of this place must be protected,” he added. “We will defend our democracy and our security.”

But in a statement Sunak said the UK’s current approach to China was in line with the approach taken by other western countries, including “every other G7 partner”.

The fear at the Treasury and in Downing Street is that if the UK takes reprisals against China it will trigger a response by Beijing, while other western countries refrain from taking similar action.

Emmanuel Macron, French president, Olaf Scholz, German chancellor, and Antony Blinken, US secretary of state, are among those who have recently visited Beijing.

James Cleverly, UK foreign secretary, visited China last month, telling the FT that it would be a sign of “weakness” if Britain did not engage with Beijing. Sunak refused to answer directly Labour questions about whether Cleverly raised the Westminster spying allegations.

Meanwhile, the parliamentary researcher accused of working for Beijing has denied the spying allegations levelled against him. Speaking through Birnberg Peirce, the law firm representing him, the researcher said he felt “forced to respond to the media accusations that I am a ‘Chinese spy’.”

“Given what has been reported, it is vital that it is known that I am completely innocent,” he added. “I have spent my career to date trying to educate others about the challenge and threats presented by the Chinese Communist party.”

A highly critical report by parliament’s intelligence and security committee in July said the UK government’s response to China’s “increasingly sophisticated” espionage had been “completely inadequate”. The government is expected to reply to that report this week.

Former Tory prime minister Liz Truss stepped up pressure on Sunak to take tougher action against Beijing. “What we need to do is to recognise that China is the largest threat both to the world and the United Kingdom, for freedom and democracy,” she said.

Iain Duncan Smith, another former Tory leader, said: “It is, of course, appalling news that we have a potential cell operating in and around Westminster, an espionage cell.”

Sunak told Chinese premier Li Qiang at the G20 summit in New Delhi last week that he had “significant concerns about Chinese interference in the UK’s parliamentary democracy”.

China denied the spying allegations on Monday. “The so-called Chinese involvement in espionage activities in the UK is entirely groundless,” the foreign ministry said.