Osborne claims EU has halved UK's bill to £850m

Mr Osborne said the UK would get its full annual rebate on contributions to the EU budget - usually worth around £3 billion - which would be paid upfront.

Following a meeting with fellow EU finance ministers in Brussels, Mr Osborne said in a series of messages on Twitter that the original bill was "unacceptable".

He added: "Now we've halved the bill, delayed the bill and no interest on the bill. Result for Britain.

"We'll get full British rebate - paid upfront. We will pay c£850m total, in instalments in second half of next year."

A furious David Cameron demanded that the issue of the British contribution be put on the agenda of today's Ecofin meeting of EU finance ministers in Brussels, after it emerged at a summit of EU leaders last month.

The Prime Minister insisted that he would not pay by the initial deadline of December 1, and would not hand over "anything like" the 2.1 billion euros demanded.

Initial reports from the Brussels meeting indicated that the UK's EU partners had agreed only to delay the payment., rather than reduce it.

France's Michel Sapin said a "consensus" had been reached that countries facing large bills - which also included the Netherlands, Italy, Malta and Cyprus - could be given until September 1 to pay.

"On this proposal, it seems to me that a consensus is being established. We have to wait until the end of the debate, but it is around this proposal that a consensus is being built," said Mr Sapin.

Speaking in Helsinki before the conclusion of the finance ministers' meeting, Mr Cameron warned that there would be "a major problem" if Britain's demands were not met.

Mr Osborne said that he had secured agreement from his EU counterparts that the system of calculating adjustments to member states' contributions would be reformed.

The £1.7 billion demand arose from a recalculation of Britain's gross national income (GNI) relative to other EU states, taking in new accounting rules which include the value of black economy activities like prostitution and drugs.

"I've had intensive and constructive discussions with other countries and the Commission," said Mr Osborne.

"EU rules will be changed for ever so this never happens again."

Conservative MEP Daniel Hannan suggested that the deal achieved by the Chancellor may not represent any reduction to the amount being demanded from the UK.

The apparent reduction seemed to have been achieved by bringing forward the rebate due to the UK every year, which would anyway have been applied to Britain's contributions in due course, he said.

"The EU sticks us with a bill. Ministers double it, apply the rebate, return to the original figure and claim victory. We're meant to cheer?" said Mr Hannan.

"Britain is worse off in absolute terms, but a straw man has been knocked down. A prelude to how the pro-EU side will fight the referendum."

Speaking to reporters in Brussels, Mr Osborne said: "The Prime Minister said this was unacceptable and I said we would get a better deal.

"We have worked intensively and constructively with the Vice-President of the Commission and the other member states.

"And today I can say this - instead of footing the bill, we have halved the bill, we have delayed the bill, we will pay no interest on the bill. And if there are mistakes in the bill we will get our money back.

"We have also changed permanently the rules of the European Union so this never happens again.

"This is far beyond what anyone expected us to achieve, and it's a result for Britain."

A 10 Downing Street source insisted there was "no guarantee the rebate would have applied to this" before the deal struck in Brussels.

"The rebate on the surcharge is being applied in full, " the source said. "We are not getting a third back but getting a half back, and exceptionally that is being applied straight away.

"That means we are paying £850 million, in two instalments, next year, with no interest and no fine."

The source added: "Our view is that this is a very good deal."

Mr Cameron said: "I said we wouldn't pay £1.7 billion on December 1. We've now halved the bill and will pay nothing until next July. We're delivering for Britain."

In a press conference in Brussels, European Commission vice-president for budget Kristalina Georgieva acknowledged that this year's process of adjusting member states' contributions had resulted in "very unusually large-sized corrections".

Ms Georgieva said that the Commission had agreed to come forward with proposals for reform to ensure that, where there are "exceptional circumstances" and states face unusually large bills, they will be allowed to pay their contributions by "staged payment".

She said it had been agreed "to do it in a fair way", ensuring "equal treatment" of all countries involved and "looking very carefully at how the application of this staged process would affect each of our member states".

Ukip leader Nigel Farage said that Britain would still pay the full £1.7 billion bill.

Writing on Twitter, Mr Farage said: "Osborne trying to spin his way out of disaster. UK still paying full £1.7 billion, his credibility is about to nose dive."

Austria's finance minister said that there was no question of changing the total sums of money being demanded from countries including Britain.

Hans Joerg Schelling told a press conference in Brussels: "Whether the money is to be paid in instalments or as a lump sum is a discussion we can have.

"But the amount cannot be put in question. That was clear from our position and from that of several other countries, obviously."

Shadow chancellor Ed Balls said: "David Cameron and George Osborne are trying to take the British people for fools. Ministers have failed to get a better deal for the British taxpayer. Not a single penny has been saved for the taxpayer compared to two weeks ago when David Cameron was blustering in Brussels.

"By counting the rebate Britain was due anyway, they are desperately trying to claim that the backdated bill for £1.7 billion has somehow been halved. But nobody will fall for this smoke and mirrors. The rebate was never in doubt and in fact was confirmed by the EU Budget Commissioner last month.

"The fact is, the Treasury knew about this issue for weeks and weeks but the Chancellor was asleep on the job. And David Cameron and George Osborne have totally failed to make the alliances we need in Europe to get a better deal for the British taxpayer."

Ms Georgieva said the additional contribution being demanded from the UK meant that its rebate was also increased, leading to a "downward correction" in the overall sum to be paid. The rebate of around 1 billion euros would normally be payable on the last day of 2015, but in these exceptional circumstances it will "converge" with the payment.

"The adjustments for the UK mean that the UK has to pay more, but also that, as a result of this increase, the UK rebate will go up," she said.

"Given that payments no more are due for exceptional large sums on December 1, but they would be spaced over a longer period of time, then the payment and the rebate would match in time.

"So in this sense, factually, yes, what the Chancellor has said, that when time comes for payment it would be downward corrected by the rebate, is accurate."

She added: "The UK receives a rebate on their contribution. But when, in years when the UK has to pay additional because of GNI corrections, normally this payment would be on December 31 and it would be in the full amount.

"The proposal that we are putting forward, in exceptional years this period of time will be stretched into the next year and when this happens - and it will be in this exceptional circumstance - then the payment and the rebate on the payment could converge. In a normal year they would not.

"In a normal year they would not. In a normal year you have a payment on December 31 and then next year in the spring we have the calculation of the rebate on this payment."