Britain fights EU plan for children's clothing tax

Three EU countries, including Britain, are threatening to veto controversial moves by the European Commission for VAT to be levied on children's clothes and shoes.

Finance ministers from the UK, Ireland and Luxembourg will voice their opposition at a meeting in Brussels today, one day before the Commission is scheduled to decide on the issue.

Frits Bolkestein, the European commissioner for the internal market, wants to lay down rules that simplify procedures within EU countries, which have a host of exemptions to minimum VAT rates of 15 per cent.

The issue is sensitive in the UK, which applies 17.5 per cent on most items, because the Government gave a manifesto commitment before the 2001 general election to maintain the zero rate on children's clothes and shoes.

In Ireland in 1982, a proposal by John Bruton, its Finance Minister at the time, to put VAT on children's clothes and shoes brought down the government. The current Irish Finance Minister, Charlie McCreevy, has already said that he would oppose any plan by the Commission to do the same thing.

Last night, seniorofficials in Brussels were locked in tense negotiations on whether to proceed with the plans to end zero rating on children's clothes and shoes, due to be approved tomorrow. They know that just one nation could veto the proposal.

Mr Bolkestein's officials argue that the exemption distorts the EU's internal market. They also say that zero-rated children's clothes are more expensive in the UK than in five other EU nations, including Denmark, where the tax is applied at 25 per cent. The same situation applied to children's shoes, where five other European nations, including Sweden, which applies a 25 per cent VAT rate, have cheaper products than Britain.

Commission officials say that this proves that the effect of zero rating is more than compensated for by the profit margin of the clothing companies. But that analysis is rejected by the UK, which has described the right to carry on zero rating children's clothes and shoes as one of its "red lines". One official said: "If VAT was put on children's clothes and shoes at 17.5 per cent, prices would go up."

That point will be made forcefully by Britain at today's meeting in Brussels as part of a concerted effort to dissuade the Commission from bringing forward a specific plan.

Last night an EU source said that France would be able to apply a reduced rate of VAT on restaurants, to fulfil an election pledge by President Jacques Chirac. The government in Paris argues that takeaway food is subject to a lower rate, to the disadvantage of restaurants and cafés.

Nine EU nations already have a reduced rate in some areas of the catering industry, but this is permitted because it was in operation before the most recent revision of the rules in 1992.

Paris will also be told tomorrow that it can keep its 5 per cent reduced VAT rate on pay TV services, sparing France's Canal Plus from a feared VAT rise to 19 per cent.

France would also be able to introduce lower VAT on labour intensive services such as hairdressers, bicycle or house repair, the European Union source told Reuters. The Commission decided to give a special rate to the building industry to help reduce the black market in this sector. But a request to introduce lower VAT rates on CDs was turned down.