A battle over lower tax rates for hairdressers, restaurant meals, compact discs and children's clothes is likely to draw to a close tomorrow when the European Commission is expected to give in to pressure from national governments over value-added tax.

The dispute has highlighted the extreme sensitivity of European Union tax proposals and the difficulty of altering the status quo.

All the EU states have called for the Commission to continue a pilot scheme for lower VAT for "labour-intensive services" for two more years.

The programme allows rates below the EU standard VAT range of 15-25 per cent to be levied on services such as hairdressing and building work.

Until now, the Commission has opposed prolonging the lower-VAT scheme, which expires at the end of this year, arguing that it has failed to generate more jobs.

But it is now preparing to give way, in a move that EU diplomats expect will effectively end a wider debate about lower rates of VAT for a range of goods and services.

"The Commission is seriously considering whether or not to agree to this unanimous call by the member states and the view of the European Parliament," said a spokesman for Mr Frits Bolkestein, EU internal market commissioner.

A Commission proposal to extend the labour-intensive scheme would remove the pressure to resolve the more general dispute about reduced VAT rates, which has inflamed passions in Paris, London and elsewhere.

Member states have been unable to agree among themselves over such rates - in contrast with their unanimity over labour-intensive services.

As a result, if the Commission proposes an extension to the scheme for labour-intensive services tomorrow, all the other areas under dispute are likely to remain unchanged.