Gordon Brown has backed down from an attempt to claw back million of pounds of the British rebate from the EU.

The Chancellor abandoned his year-long fight to save about £90 million a year when all the 26 other EU countries stood firm against him.

Mr Brown was backed into a corner by French negotiators, who agreed to support his plans to tackle VAT fraud only if he gave up on his effort to rewrite the EU budget that was agreed by Mr Blair in 2005.

The Chancellor surprised many in Brussels by trying to reopen the deal by insisting that Britain did not have to contribute to “mini rebates” that were agreed for Germany, Sweden and the Netherlands as part of Mr Blair’s deal to keep the British rebate, albeit one that was reduced by a fifth.

The reversal follows attempts to portray Mr Brown as a strong negotiator battling for British interests in a similar manner to Baroness Thatcher, who won the rebate in 1984. Ed Balls, the Treasury minister, said last year that “what we will see is Brown the tough negotiator who will stand up for Britain’s interests, who’s willing to say ‘no’ when ‘no’ is the right thing to say”.

The Treasury refused last night to make a link between the rebate climbdown and the agreement on a new mechanism to fight VAT fraud in the electronics sector. Such fraud costs the Treasury an estimated £2 billion a year and officials hope that the new rules will lead to a saving of up to £500 million a year.

A French diplomat said: “The British were given to understand that if they wanted their way on VAT, there was another issue on which they needed to give ground.” The deal is due to be adopted formally at a meeting of foreign ministers in Luxembourg on April 23. The diplomat said that the EU presidency, which is held by Germany, had called for a media blackout of the deal before then, adding: “If the British tabloid press gets hold of this, London may change its mind.”

Graham Brady, the Shadow Europe Minister, said: “When Tony Blair surrendered billions of the British rebate, Gordon Brown was quick to claim that he would be a better defender of Britain’s interests. If these reports are true, it will show that his tough rhetoric was just a sham. If the Chancellor caves in over the rebate, hard-pressed British taxpayers will like him even less.”

A Treasury spokesman said: “It is plain wrong to suggest there are additional costs to the UK as a result of the deal announced today. The fact of the matter is that the Government is successfully implementing the deal agreed in 2005, unchanged from that presented to Parliament at the time.

“Separately, several weeks ago we agreed new rules with our EU partners to tackle missing trader VAT fraud, and we are pleased that decision is now approved, a decision to be welcomed in the fight against tax fraud. But there is no link between these two dossiers, and it is wrong to claim otherwise.”

The rebate has saved Britain more than £50 billion since 1984, but the financial gain has come at a high political price. When Mrs Thatcher declared: “I want my money back”, the EU agreed because Britain was one of the poorest countries in the EU and received few subsidies towards farming and development. Today Britain is one of the richest countries in an EU with many poor new members.

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