THE European Union will make a last-ditch attempt to avoid an embarrassing deadlock over changes to its tax rules today when officials will press Poland to withdraw its veto over a key deal on VAT.

The talks come after Warsaw plunged the EU into turmoil when it rejected an agreement that would enable EU states to apply a low VAT rate to services ranging from home improvement to hairdressing.

Poland’s right-wing Government has been holding out against a deal approved by the EU’s 24 other member states to extend the reduced VAT regime on labour-intensive services until 2010.

Nine EU countries — although not Britain — take advantage of the exemptions to apply low-rate VAT to such services as hairdressing, bicycle and shoe repairs and window cleaning.

Without the agreement, the countries will have to apply a minimum VAT rate of 15 per cent or face legal sanctions.

France and the Netherlands claimed that the failure to secure a compromise could fuel unemployment and hostility towards Brussels.

Last night, the chaos spread as Thierry Breton, the French Finance Minister, said that he would continue to apply the reduced VAT regime, even though it formally expired at the end of December. Defying the threat of legal action by the European Commission, M Breton promised to maintain a VAT rate of 5.5 per cent for home improvements “while discussions are ongoing”.

Yesterday, a spokesman for the Austrian Government, which holds the EU presidency, condemned the Polish veto as “unacceptable”.

Karl-Heinz Grasser, the Austrian Finance Minister, described the row as “very serious”, but added that he still hoped for a compromise. He said that he was planning to meetZyta Gilowska, the Polish Finance Minister, in Vienna today.

Last night, there were signs that Poland was buckling under the pressure, with Mrs Gilowska saying she was “hopeful” of an agreement.

Poland, which says that the compromise discriminates against “new” Europe, is demanding the right to maintain a low rate of VAT on the construction of new homes until 2010. It is also pressing for similar reductions on food and agricultural materials.

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