From July 1, the new European legislation will require banks throughout the EU (and in Switzerland, the Channel Islands, Isle of Man and other territories) to deduct a withholding tax initially at 15% from overseas residents' bank interest - unless with the depositor's prior consent, they notify the home tax authorities of the depositor's identity.

According to Blick Rothenberg, UK taxpayers who do not agree that their European bank can advise the UK authorities of their identity - and who therefore suffer the withholding tax under the new directive - will suffer a double whammy. They will suffer foreign withholding under the new arrangements but enjoy no credit in the UK against their UK tax liability on such income for the tax withheld. They will still have to pay full UK tax on the interest when this is either declared or is eventually discovered by the UK tax authorities. Moreover, if not properly declared, severe penalties and interest on unpaid tax will arise.

The effective rate of withholding tax is addditionally set to increase from the initial level of 15% to 35% by 2011.

Speaking on behalf of the firm, Steven Bruck observed that:

"Whilst this will strike heavily at many tax avoiders who have doubtless quietly maintained undisclosed overseas accounts, the more sophisticated amongst them may be expected to roam further afield to areas beyond the EU such as Bermuda or Singapore which have not yet adopted these rules. It is anticipated that the European tax authorities will turn their attention to these territories in the not too distant future. One method being widely suggested is the formation of off-shore companies which may continue to receive interest without deduction of tax - which unless reported is of course equally a breach of UK tax law."

He went on to add that:

"If the British tax authorities are serious about eliminating illegal tax practices this might be a sensible time to introduce a tax amnesty to permit declaration of such matters. This mechanism has been adopted at various times in certain other countries and can be most helpful as a carrot, to accompany the stick of new regulatory legislation."