Robin Oakley: "It's a direction Britain doesn't want to go"

The escalating argument has lead to calls by the German finance minister to take away the UK's right to block any change in European tax laws.

Gordon Brown, the UK chancellor, has vociferously attacked plans to harmonise tax rates across the European Union (EU).

He believes the move could lead to higher costs for UK businesses and thousands of job losses.

However German Finance Minister Oskar Lafontaine has put himself on a direct collision course with Mr Brown by calling for rules which allow individual nations to veto EU proposals to be scrapped.

Brown: Ready to use veto

If the controversial move was adopted it would lead to a fundamental change in the way the EU is run.

Mr Lafontaine immediately won the support of French Finance Minister Dominique Strauss-Kahn. He said he favoured majority voting to root out tax distortions that damage competition.

The BBC's David Shukman: UK will oppose any move to stifle business flexibility

Mr Brown immediately fired back by dismissing the proposal.

"Everybody knows that tax proposals require unanimity, and a change to that requires a treaty change ... and that is simply not going to happen," he said.

The battle between the UK and Germany erupted during talks between EU finance ministers in Brussels which ended in deadlock on Tuesday.

Mr Brown has been opposing standard rates of taxation on savings and investments and any measures that could stamp out special tax breaks that might boost specific business sectors, like the UK film industry.

Germany has made tax harmonisation one of its priorities when it assumes the role of EU presidency, in January.

Lafontaine: The proponent of tax hamonisation

Mr Lafontaine is believed to want minimum rates of corporation tax in all EU countries.

"It is my personal view that we eventually must go to qualified majority voting on the sensitive issue of taxes," he said.

The issue has become one of the most sensitive for the UK government as a decision about its membership of the single currency draws closer.

Franco-German axis

Brown: Hopes for support from Spain

Although no decisions were made at the Brussels meeting, the fact that these discussions were happening at all is a signal that many countries believe a unified currency should be followed by more unified taxes.

The UK is likely to join forces with Spain's Conservative Government, which is expected to push for more flexible "business-friendly" policies.

Adair Turner, Director General of the main UK employers' organisation, the Confederation of British Industry, has also said that joining the single currency did not necessarily imply a uniform rate of tax.

Conservative attack

The Conservative party has attacked the government on the issue, accusing it of hypocrisy.

Lamont: This probably isn't a left-wing plot

Frances Maude, the Conservative Shadow Chancellor, told BBC Radio 4's Today programme that the government said one thing to its partners in Europe, and another at home.

He said that the proposal for a withholding tax on savings and investment would devastate jobs in one of Britain's most successful industries, and urged Gordon Brown just to say no.

Reprieve for duty-free?

Separately Gordon Brown has backed calls by Germany to save duty-free shopping.

Duty-free shopping, which offers UK tourists the chance to buy cheap alcohol and cigarettes from continental Europe, is due to be scrapped in June.

German officials are worried that thousands of jobs could be at risk if duty-free sales go.

Mr Brown's intervention has raised hopes that the duty-free shopping will win a reprieve, although he warned campaigners not to raise false hopes as the decision hinges on a vote by EU member states, which has to unanimous.