The already bitter dispute took a turn for the worse when Britain threatened to use its veto to block further progress on the EU's two-year old code of conduct against harmful corporate tax practices, which the EU insists must be passed as a whole package. Apart from addressing harmful tax practices the code of conduct is also an important part of plans to deregulate and harmonise EU financial markets.

According to John Palmer, director of the European Policy Centre in Brussels the Code is " an essential part of completing the level playing field of the single internal market" and "a building block for the `E' part of EMU".

Following the meeting British Chancellor Gordon Brown added fuel to the fire by claiming victory on the withholding tax debate. 'We are winning the argument. We will continue to talk constructively but we will not agree to anything that is against the British national economic interest or that would put at risk the competitiveness of Europe or jobs within Europe.'

Brown's comments drew angry responses, particularly from the Finnish EU Presidency and German Chancellor Gerhard Schroeder who was scathing: "Negotiations on the taxation of interest income have been blocked by the intransigent behaviour of one member state," Schroeder said. "I make no secret of the fact that I have little understanding for such blockade tactics that place national interest above necessary European solidarity. "This policy is damaging to Europe and, over the longer term, their own interests."

Finland tried unsuccessfully to introduce a compromise deal with a greater emphasis on disclosure as a means of combating tax evasion, but this was met with stubborn resistance by Britain. The Finnish compromise would reduce the cost of administering the tax by allowing agents to verify investors' claims of non-EU residence based on national identification procedures which would later be replaced by European standards.

Finland has now all but abandoned any hope of brokering a deal with Britain at next month’s Helsinki summit.