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FT.com
France gives UK budget rebate ultimatum
By George Parker in Brussels
Published: February 1 2007 23:01 | Last updated: February 1 2007 23:01

France has told Gordon Brown, the UK chancellor of the exchequer, to hand over
part of Britain’s European Union budget rebate, or it will block his plan to
tackle a multi-billion pound value added tax fraud.

France’s decision to link the two unrelated issues is a classic example of EU
horse-trading, but Paris is being egged on by other countries angered by Mr
Brown’s attempt to cut Britain’s payments to the European budget.

The stand-off is infuriating for Mr Brown, who told MPs in December he had
reached a deal with France over his plan to change Britain’s VAT system to stop
a cross-border fraud racket involving mobile phones and computer chips.

A change to a national sales tax system requires unanimous backing from all
other European member states, giving France and other countries a veto.

France denies making any link and insists publicly that it has not signed off
the British plan for “technical reasons”. It fears that a new sales tax system
in the UK could push fraud across the English Channel.

But five diplomats from different countries have told the Financial Times that
Paris has warned Mr Brown it expects him to end his one-man stand on the rebate
if he wants France to do the UK a favour on fighting tax fraud.

Privately British officials admit France has boxed the chancellor into a corner,
but a Treasury spokesman said: “We don’t draw a connection between these
discussions.”

Most diplomats thought the vexed question of the EU’s seven-year budget – and
Britain’s notorious rebate – had been settled at a Brussels summit in December
2005, chaired by Tony Blair, prime minister.

But Mr Brown believes Mr Blair got a bad deal for Britain and last year tried to
unpick part of the agreement in a move that some Treasury officials believe
could save the UK taxpayer tens of millions of pounds a year.

At the heart of the dispute are the special deals struck in 2005 by four other
big net contributors to the EU budget – Austria, Germany, the Netherlands and
Sweden – which were offered lump sum refunds.

Mr Brown argues that Britain’s rebate should also apply to those refunds,
cutting the UK’s overall payments. “They are still refusing to pay their fair
share,” one diplomat said.