Brussels wants to put VAT on food

The European Commission wants to scrap the zero rate which currently saves British households £28 billion in extra taxes.

The move is certain to anger Gordon Brown as the refusal to tax necessities has always been a key principle of Labour policy.

The Government insisted it would defend Britain's right to keep key items VAT-free by fighting the plans to streamline tax rates across Europe.

Whitehall officials revealed the Prime Minister was prepared to use the veto in one of his first major tests in Europe.

A Treasury spokesman said: "We are crystal clear on this. We will veto any European attempt to tax food or children's clothes."

Britain fought successfully not to charge VAT on food, children's clothes, shoes, transport fares, medicines, books and newspapers when it joined the European Union in 1973.

As a concession it agreed to impose a "zero rate" of VAT, meaning that tax is technically levied but is valueless.

Now the commission wants to abolish the zero rate as it has always intended the minimum rate to be five per cent for a restricted list of goods.

Under existing rules, most goods should be taxed at a rate between 15 per cent and 25 per cent; Britain's VAT rate is 17.5 per cent.

The UK zero rate has no expiry date and is bound to survive beyond any talks. But some items which previously attracted low VAT - such as nappies - could now be taxed more heavily.

Britain is instead pushing for lower rates on energy saving products to encourage environmental awareness. The UK applies the lowest rate on domestic fuel and power.

Brussels claimed harmonising tax rates would improve the EU economy.

EU tax commissioner Laszlo Kovacs said: "The application of VAT reduced rates is a very sensitive issue in an area where the unanimity principle forces all stakeholders to be inclined to compromise."