The Federation of Small Businesses has welcomed plans by the European Commission to allow VAT cuts on labour intensive and locally provided services.

The move will allow national governments to cut tax in areas such as housing, domestic care services, personal care, gardening and restaurants.

The body is now calling on the government to seek a less rigid application of VAT rules to allow greater flexibility in implementing such initiatives.

"As the credit crunch bites, some of the first luxuries to go will be home improvements, eating out and a trip to the hairdressers, so local businesses in these areas will welcome this move," said Tina Sommer, EU and international affairs chairman.

"The British government must take advantage of these proposals to ensure our high street can survive the economic downturn."

The FSB also warned that the UK's right to exempt certain items - such as newspapers and children's clothes - altogether should continue.