Brussels could end Britain's £2bn tax rebate

The future of Britain's £2bn EU budget rebate was thrown into doubt yesterday when the European Commission decided to examine whether it should be ended in 2006.

Allies of Romano Prodi, president of the European Commission, have made little secret of their desire to get rid of the rebate. Its future will be studied as part of a review that will also consider whether to fund the EU from a new tax which would replace the current, complex financing system.

The decision heralds the start of an offensive against the rebate, which was negotiated in 1984 by Margaret Thatcher to compensate the UK for the fact that its gets relatively little in subsidies for farmers and pays more into the EU than it gets out.

The British Government sees the rebate as a political symbol, and any threat to it could boost the Eurosceptic cause and hinder Tony Blair's efforts to persuade the public to back membership of the euro. The Commission's plan to consider a European tax will also be politically sensitive because it would be seen as a step to giving the EU more power.

The EU is funded by a complex mixture of duties and VAT revenues and because the system is complex, citizens have little idea how much money goes to Brussels. But finding a single tax to replace this system is difficult, partly because taxes are levied at different rates in different countries.

The rebate is guaranteed until 2006, but will need to be renegotiated in 2005. The 10 countries joining next year were angered to discover they would help finance the rebate, with Poland, the biggest applicant, expected to pay €232m (£160m) towards it in 2004.

The issue is on the agenda of a commission working group on resources, to be chaired by Michaele Schreyer, the EU budget commissioner. Hers is one of six working parties that will prepare for the next spending round, from 2007-13. Their work will be used to draw up proposals to be negotiated at a summit in December 2005.

The UK argues that, in recent years, its net contribution has been almost three times that of France. A British official said: "It is entirely expected that this will be discussed. Our position is clear, that the rebate is there to serve a useful purpose by making up the difference between the UK's receipts [from the EU] and its expenditure."

The six working groups will look at a range of financial issues, including administration, citizenship and civil liberties, the EU's global role, economic policy, and redressing the inequalities between states.