Major to hold crunch talks on VAT row: Tory MPs fear another poll tax debacle as Clarke and Lilley squabble over compensation for fuel bills

THE Prime Minister is taking urgent action to break the ministerial deadlock on compensation for millions of people who will be hit by value-added tax on fuel from April.

John Major will chair a series of meetings over the next few days with Kenneth Clarke, the Chancellor, and Peter Lilley, the Secretary of State for Social Security, amid signs that the Chancellor wants the compensation package to be well under half the pounds 950m total that the tax is due to raise in 1994-95.

Although the package will not be announced until the November 30 Budget - and might not be reported to the rest of the Cabinet until then - senior ministers now expect the outline to be settled over the next fortnight. Mr Lilley is arguing for a wider scope for the package. The issue has brought into sharp focus a loss of political support among pensioners with limited savings who have seen their incomes dwindle because of falling interest rates.

The Prime Minister's personal intervention was seen at Westminster as indicating that he wants to prevent Mr Lilley conceding too much to the Chancellor. But Mr Major is thought to accept Mr Clarke's argument that increasingly restive backbenchers are overestimating the real impact of the fuel charges on consumers.

Some ministers have become alarmed at reports that the compensation could amount to as little as 30p a week. 'It would be like the poll tax all over again,' said one Tory MP.

Backbench fears will be fuelled by a Daily Telegraph Gallup poll today showing the Tories trailing in third place at 24 per cent, compared with 25.5 per cent for the Liberal Democrats and 46.5 per cent for Labour.

Although the Chancellor reported to the Cabinet yesterday that the broad totals for each spending department have been fixed, Mr Clarke can still raid the agreed budgets of individual departments for assistance with the package.

But the Chancellor underlined his resistance to a large-scale package for the so-called 'nearly poor' when he confined himself to saying that the package would give 'some help' to those who have 'difficulty paying this tax'.

The Westminster assumption is that Mr Clarke is considering no more than an average of 50p per week for up to 7 million people. The Treasury said yesterday that the full 17.5 per cent on fuel bills as a result of the tax would cost the average family about pounds 2.30 a week.

In the wake of Wednesday night's parliamentary mayhem over rail privatisation, the Cabinet yesterday concentrated on the legislative programme for the next session of Parliament, which Mr Major is hoping will help to revive the Government's fortunes. It will focus on law and order measures, with a Criminal Justice Bill, a Bill on police reform, liberalisation of the Sunday trading laws and a comprehensive deregulation Bill.

But the one issue not discussed at yesterday's Cabinet, the VAT package, remains the chief worry among ministers. The Prime Minister's office openly acknowledged yesterday that it was the subject of a traditional Treasury negotiation, implying that Mr Lilley was fighting attempts by the Chancellor to limit the scheme.

Mr Clarke is under pressure from some backbenchers to bring in VAT on fuel in one go at 17.5 per cent from April, although that would mean more compensation. Senior Tory MPs remain deeply concerned that the settlement of the battle over defence spending will still leave the armed forces facing deep cuts. Sir Nicholas Bonsor, Tory chairman of the Commons Select Committee on Defence, has made it clear to colleagues that the threat of a Tory rebellion will be revived if there is no assurance of a bigger defence allocation next year.

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