It claims the move could fail and skates over some of the more urgent issues.

The institute's analysis indicates that if countries outside Europe decide to ignore the ruling, there would be little the EC could do. And legislators will forever be involved in a game of catch-up as the technology evolves.

Richard Baron, deputy head of the Policy Unit at the IoD and author of the report, said: 'The European Commission has had a good stab at the problem, but it has not resolved all of the issues. Sadly it has skated over some of the harder questions. Tax authorities must face their limitations squarely if we are to get sensible decisions.'

VAT on Digitised Products also warned the Commission's statement that e-commerce should not develop in a manner incompatible with public interests 'wildly overestimates' the powers tax authorities should get or already have.

It says the European Commission cannot prevent technology developing in whatever way it happens to go, and if it did achieve that it would be disastrous for progress and our future prosperity.