Britain isolated as EU insists on common tax plan

Tony Blair faces a European summit showdown over tax next week, after a meeting in Brussels yesterday left Britain more isolated from its EU partners than at any time since the general election.

Tony Blair faces a European summit showdown over tax next week, after a meeting in Brussels yesterday left Britain more isolated from its EU partners than at any time since the general election.

In an echo from the Thatcher era, France, Germany and Italy won wide support after circulating a joint note accusing Britain of exaggerating its difficulties over a savings tax, and demanding a summit discussion next week in Helsinki.

At stake is a package of tax measures which is likely to collapse if Britain goes ahead with its threat to veto a proposed directive to the taxation of interest on savings.

There will be a final attempt to break the deadlock at next week's summit, indicating that there is a belief in Brussels that the outstanding problems are political, rather than technical.

During yesterday's meeting Christian Sautter, France's finance minister, argued "there's one main problem which is a British problem." The chairman of yesterday's meeting Sauli Niinisto, Finland's finance minister, said the UK was now "at loggerheads" with the other member states, that its problem was "political", rather than technical and that the tax package was in "dire straits".

Vincenzo Visco, the Italian finance minister, said a British veto would produce a "serious political problem" with the "gravest consequences" while his German colleague suggested failure would be harmful for the European economy and common currency.

After the meeting Gordon Brown, the Chancellor, was accused of stretching language "beyond its natural boundaries", after claiming that he was winning the argument.

The idea behind the legislation is to stop EU citizens dodging tax by investing their money in other European countries. It would force member states to levy a tax of 20 per cent on interest earned or to pass on the details to the investor's native country.

The UK is demanding that eurobonds be exempt. The City, meanwhile, claims the plan threatens thousands of jobs, though it is aimed at only 5 per cent of the London eurobond trade. Financial institutions and holders of bonds already issued will be exempt. But the government argues that identifying the 5 per cent affected will drive business abroad.

The rest of the packageis designed to eliminate around 60 unfair tax breaks across the EU and to remove taxes on cross-border interest and royalty payments.

After yesterday's meeting Mr Brown, argued: "While we will continue to talk constructively, we will not agree to any directive that is against the British economic interest."He claimed he was "winning the argument" because the meeting noted the UK's continuing objections. That was swiftly rejected as Frits Bolkestein, European Commissioner for the internal market, said it would "stretch the meaning of the word beyond its natural boundaries" .Failure to agree would deprive the City of other beneficial measures liberalising financial services in Europe.