EU finance ministers failed to break a deadlock over special discounting of VAT sales taxes on Tuesday and will ask EU leaders to try to sort out the issue at a summit next week, a British spokesman said.
"This will go to the European Council (summit) next week," the spokesman, Jonathan Allen, said.
Germany dug its heels in during talks on exceptions to VAT taxes for services such as hair-dressing, which expire on December 31st and need unanimous approval among the 25 EU states to be extended.
The spokesman for Britain, as current holder of the rotating EU presidency, did not say why there was no deal, but he did allude to stiff resistance from one country.
Under an arrangement that expires on December 31st, Belgium, Greece, Spain, France, Italy, Luxembourg, the Netherlands, Portugal and Britain apply lower VAT rates to labour-intensive services than the minimum EU level of 15 per cent.
Unless there is a deal on VAT, nine member states will have to raise VAT from a reduced rate of 5 per cent to their national standard rate, such as 19.6 per cent in France and 21 per cent in Belgium, or risk facing legal action by the EU executive.
Striking a deal needs unanimous backing from 25 countries. So far, some want to keep the current list of services that qualify for discounting. Others want to add to it, and others still do not want any lower VAT rates at all.
Germany, which does not have reduced VAT on the services in question, has long opposed distortions to the minimum VAT rate and is backed by Sweden and Austria. Germany's previous finance minister Hans Eichel had been adamant the reduced VAT must go.
To complicate matters, the 10 new EU members that joined the bloc in 2004 have until 2007-2010 to bring their lower levels of VAT on some goods and services up to the EU minimum.
But they too want to keep lower rates longer or permanently. Britain has proposed prolonging the transitional period of lower VAT in the new member states until 2015.
The reduced rates were introduced six years ago as an experiment to boost employment, and have already been extended twice. The European Commission has said the job boosting plan has not worked, but a rise in VAT could trigger job losses.