Irish minister claims Straw's softening on EU tax rule has upset Chancellor

The Treasury has crushed a possible shift in Britain's hardline position on EU tax policy, amid evidence of a Cabinet rift with the Foreign Office.

The Treasury moved swiftly to contradict comments by the Foreign Secretary, Jack Straw, who said he would consider scrapping the national veto on cross-border measures to combat fraud in taxation.

Evidence of a government split was revealed by Ireland's finance minister, Charlie McCreevy, who is an important ally of the British Government on tax issues in negotiations on the EU constitution.

Mr McCreevy said there had been "some disquiet in the offices of the Chancellor of the Exchequer", following a statement by Mr Straw at a press conference at an EU summit in Rome. He added that, unprompted, the Treasury contacted his department to contradict Mr Straw, and reassure the Irish government that British policy had not changed.

The British and Irish governments have both opposed measures, laid down in a draft EU constitution, to abolish the national veto in two areas of tax policy: moves to combat cross-border fraud and co-operation among tax administrations.

Mr Straw's remarks caused dismay in the Irish government where some officials fear that he may have given away the UK's "bottom line", rather than its negotiating position.

Ireland is a crucial ally for the UK because it is the only other country that opposes abolition of the veto on any area of tax policy, arguing that it would be a "slippery slope".

The Irish finance minister said of Mr Straw's previous statement "I think this may have caused some disquiet in the offices of the Chancellor of the Exchequer".

Treasury officials contacted the Irish government on Monday morning, after Mr Straw's comments were reported in The Independent. Mr McCreevy said he was given reassurances at Tuesday's EU finance ministers' meeting by Paul Boateng, the Chief Secretary to the Treasury, who was standing in for Mr Brown.

But senior Treasury sources disputed Mr McCreevy's account of the incident, suggesting it was the Irish Government which initiated the contact on Monday and that the Chancellor of the Exchequer was not involved.

"No one from Gordon's office rang the Irish Finance Minister or Ministry," said one source close to the Chancellor. "What did happen is an official in the Irish Finance Ministry rang an official in the Treasury and said, 'What did Jack Straw say?' And they said he did his press briefing and they misinterpreted what he said. That's the end of it."

The Foreign Office has taken a contradictory position on Mr Straw's comments, refusing to explain or retract his words but insisting that the UK's policy remains unchanged.

Downing Street denied yesterday Mr Straw was attempting to soften policy and said the Foreign Office comment was not "a kite flying exercise". The Government knows that it faces a battle in opposing a move to majority voting on measures to combat fraud - something to which the government is committed.

Asked to interpret Mr Straw's motives, Mr McCreevy said he had enough trouble keeping track of the intentions of his colleagues in Dublin, let alone those in London.