The European Commission has formally threatened legal action against Poland over its charging of a reduced 7% VAT rate on children's clothes, accessories and shoes which Brussels says breaks European Union (EU) law.

Under the EU VAT directive 2006/112/EC, member states are bound to levy standard rate VAT of at least 15% on all products and services, unless they have been given special permission to lower taxes.

Said a commission statement: "Only a limited list [written into the directive] of goods and services may be subject to reduced rates of VAT.

"None of the aforementioned items [of children's apparel] are included in this exhaustive list, and Poland has been granted no derogation..."

As a result, Brussels has sent Warsaw a legal final warning note called a reasoned opinion, which gives it two months to say how it will resolve the problem, or a case may be referred to the European Court of Justice.

It could order Poland to raise its VAT on children's clothes and levy massive daily recurring fines of EUR1,000s if it refuses.

By Keith Nuthall.