British ministers and campaigners immediately vowed to fight on, calling on Tony Blair and other EU heads of government to overrule the European Commission's recomm- endation that abolition should go ahead as planned at the end of June. EU diplomats said finance ministers could order the Commission back to the drawing board.
But ministers privately admit they have all but lost the fight for duty free. The focus is turning to its successor. Dawn Primarolo, the Paymaster General, said: "We need to make it clear the successor regime proposed by the Commission is fraught with problems."
"This is disappointing but it is not the end of the road," said Brenda O'Brien of the European Federation of Transport Unions. "Clearly the Commission has snubbed the wishes of prime ministers by providing an incomplete picture of the impact on jobs and by refusing to seriously consider the possibility of an extension. It raises the question of who runs Europe. Is it the prime ministers or is it the unelected bureaucrats?"
In a long-awaited report the Commission conceded that short-term job losses would flow from scrapping the tax concession, possibly as many as 53,000, about 5,000 of them in Britain. But Mario Monti, the EU commissioner for the single market, said this was not enough to justify a change of plan.
He said duty free was a subsidy to one industry and was a burden on all taxpayers. "We considered the possibility of a limited extension but we concluded, while this would of course help the profits of the companies concerned, it would do very little for employment," Mr Monti said.
He dismissed claims that abolition of tax-free sales in the absence of harmonised VAT and excise would lead to farcical scenes on cross-channel ferries, with the price of alcohol changing four times as the ferry moved from one country's waters into another's.
He said that VAT will be levied at the rate applying in the country of departure. A ferry leaving Dover for Calais would charge VAT at the British rate but the French rate would apply for the return.
But the rules are different for excise duty on drink and cigarettes. Here the rate to be charged is the rate applying in the country where the goods are loaded - the British rate in the case of a boat leaving Dover. But it changes as soon as the vessel or aircraft moves into new waters or airspace.
"At that point the operator of the service can either stop selling the goods, in which case there is no problem, or goods can continue to be sold - in which UK excise is applied," Mr Monti said.
Vic Moorcraft of P&O ferries said the rules were "unworkable". P&O accepted the 1991 decision abolishing duty free as a logical extension of a single market, but harmonised rates of VAT and excise had never materialised, he said.
The Commission's report now goes to EU finance ministers where a unanimous decision would be needed to reopen the file. Britain, Germany and France are backing a five-year extension but Denmark is hostile to any rethink.
As a gesture of solidarity with travellers, Mr Monti said he had agreement from the Commission to study the scrapping of the generous tax-free perks for commissioners on wine, spirits and cigarettes.Reuse content