The move, made last night under acute pressure at the Berlin summit, will maintain the principle of the rebate, negotiated by Margaret Thatcher in 1984, but not apply its benefits to all the costs of the EU's enlargement to the east. With Paris causing obstructions over agricultural reform, leaders turned the British rebate into an issue of ferocious debate, forcing the new concessions from Downing Street.
After a one-to-one meeting with Gerhard Schroder, the German Chancellor, Mr Blair agreed to give up gains due to arrive as a by-product of two reforms, on the principle that the UK would be "not a penny more, not a penny less" well off.
But in an attempt to pave the way for an overall summit deal, he went further by agreeing that money spent in East Europe now which is not covered by the rebate should remain so when those nations join the EU. That, for the first time would enshrine the principle that not all UK spending inside Europe will be covered by the rebate.
However, some other nations were less than impressed with the size of the offering, outlined in draft conclusions, and France and Spain were still threatening to block the overall finance deal over agricultural reform and moves to cap aid to poorer areas. The French president, Jacques Chirac, having won a delay in dairy reforms until 2004-2005, was still pushing for more concessions.
The British move arises from a shift in the way contributions are calculated from VAT receipts to gross national product; another would allow countries to keep a greater share of the customs duties they send to Brussels.
The further concession - once ruled out by Mr Blair - involve aid to the East European countries applying to join the EU. Spending on countries outside the EU is not covered by the rebate - which gives the UK a two- thirds discount - but that will change when the members-in-waiting come in.
Although the German presidency gave the total value of the British concession as pounds 150m, sums given earlier by the British government for the component parts were higher.
Mr Blair firmly ruled out any suggestion that Britain should be forced to fund part of its own rebate, a move which would cost around pounds 300m. The other big stumbling-block to the package of measures, designed to prepare Europe for enlargement to the east, emerged over agriculture, which consumes half the EU pounds 60bn budget. Farm spending reform plans have provoked resistance from Mr Chirac, who showed few signs of accepting a deal already thrashed out by farm ministers.
As the talks broke up for bilateral meetings, Germany tabled proposals outlining two ways of saving up to 6.8bn euros (pounds 4.5bn) a year from the CAP. France produced its own proposals, which appeared designed to save money but in reality were aimed at delaying reforms on milk which would hit French farmers hardest.
Germany's proposal offered two methods of saving money: year-on-year reductions in direct payments to farmers for compensating cuts in guaranteed prices; and the postponement of agricultural reforms which are expensive in the short term because they mean compensating farmers.
But there was reluctance to unravel a deal struck by farm ministers earlier this month, and one diplomat said the German paper was a negotiating tactic to isolate France.
There was also wrangling over proposals to cut spending on regional development funds, with Greece and Spain, which benefit substantially from EU aid, fighting a fierce rearguard action. Germany, anxious to curb its own contributions to EU coffers, wants spending on poorer regions to be checked at 216bn euros for 2000-2006.
However, Spain, the largest aid recipient, was holding out for a figure closer to 240bn euros, while, at the other end of the spectrum, the Netherlands was pressing for a figure of 190 bn euros.
The biggest losers in this debate are the Irish, buoyed by record economic growth, who are now set to lose 60 per cent of their cash hand-outs from Brussels.Reuse content