The European Commission proposed a shake-up of its value added tax and state aid rules yesterday in an attempt to help small businesses, to promote economic growth and to cut administrative red tape.

Under the taxation changes on the table, a range of labour-intensive and locally provided services, including restaurants, cleaning and gardening services and shoe and computer repair shops would be eligible for a reduced VAT rate as low as 5 per cent.

Eighteen of the 27 European Union countries have negotiated special permission until 2010 to levy rates below the standard 15 per cent for services such as hairdressers and restaurants, while the other states do not enjoy such an option.

The Commission believes that the patchwork of reduced rates on certain services that do not compete with those in other countries should be replaced by a blanket system that would be available to all and would continue after 2010.

Laszlo Kovacs, the Taxation Commissioner, justifying the initiative, said: “There is no reason why restaurant services, for example, should be allowed to benefit from a reduced rate in one half of the European Union but not in the other half.”

In parallel, the Commission is looking to give governments greater scope for targeting national aid at a variety of measures to help small businesses and to protect the environment.

In future, they will no longer need to secure approval from Brussels before providing assistance of up to €7.5 million (£6 million) to small companies for research, innovation, training and risk capital. Red tape will also be cut for aid for environmental protection or to help women to start up and develop a business.

Neelie Kroes, the Competition Commissioner, said that the new rules would “reduce the administrative burden on companies and public authorities” and would enable national authorities “to release funds sooner at well targeted objectives”.

The changes to the EU’s state aid rules will take effect before the end of next month. However, the plans to reduce VAT rates must be approved unanimously by national governments and will face opposition from Germany and Denmark.

France has repeatedly pressed unsuccessfully for the right to cut VAT on its restaurant bills and is certain to try to push forward the proposal, which also foresees reduced VAT rates for children’s nappies, CDs and CD-ROMs, during its current EU presidency.

Despite pressure from President Sarkozy, there is no suggestion of cutting VAT on fuel to offset the big rises in oil prices. Nor has the Commission taken up the British and French idea of applying a lower level of VAT on energy-saving goods and services.