As a result, the two countries will be able to continue levying a zero VAT rate on children's clothes and shoes.

London and Dublin had opposed proposals to do away with VAT exceptions allowed in some of the 15 member states.

Refusing to back down, the two countries said they would block any legislation to harmonise VAT rates.

As any legislation needs unanimity from all countries, the position of thetwo governments threatened to scupper the legislation completely ? much tothe consternation of France and Belgium.

These countries needed the tax plan adopted before the end of the year or else they would lose their right to reduce VAT on home repair work.

A compromise was hammered out only after Italy, the current holder of therotating six-month presidency of the EU, proposed keeping the status quo.

Rome also suggested the reduction of VAT rates on CDs and records, whichFrance has long lobbied for. Denmark, Sweden, Germany and Austria howeveropposed this proposal.