Brown stands firm over VAT

Gordon Brown, the Chancellor, yesterday reaffirmed his commitment to cut VAT on heating fuel, despite warnings from Brussels that the move could breach the spirit of European common tax rules.

However, Mr Brown and the European Commission seemed determined to avoid a direct clash over the issue for as long as possible.

Mr Brown has made clear that the Government's legal advice states that the move is in no way illegal under EU law. To abandon a manifesto pledge so soon after the election would clearly be unthinkable for the Government. For its part, the European Commission concedes that the move is not "illegal" as such, but simply contrary to the objectives of tax harmonisation directives.

There is clearly little desire on the Commission's part to crack the whip at a time when hopes of consensus on a range of other key issues are higher than they have been for many years. Nevertheless, the conflict over the VAT move is unlikely to disappear. Behind the immediate disagreement lies the broader, highly contentious, question of how far member states should be expected to develop common tax levels.

The Commission's long-standing efforts to harmonise VAT levels have been largely ineffective. A minimum of 15 per cent has been set for most products, but how binding this figure is remains open to interpretation. Britain wants to reduce VAT on domestic fuel from 8 to 5 per cent.

The European Commission, along with member states, is pressing for more harmonisation in tax levels. Efforts have so far concentrated on indirect taxes, such as VAT, but harmonisation of certain direct taxes is also planned. Pressure for greater co-ordination has increased in the run-up to economic and monetary union.

If the Commission decides to get tough, it could take the Government to the European Court of Justice. And if other member states thought Britain was being let off the hook, they could go to the court.