OFFSHORE savings accounts, a haven for tax-averse investors, are no longer immune from the taxman. A new EU ruling, which came into force yesterday, means that investors can no longer sidestep tax charges by keeping quiet about their offshore interests.

The new savings directive says that all EU member states must share information about savings income paid to foreign customers. Basic-rate taxpayers in the UK must pay 20 per cent tax on all interest earned on their savings, while higher-rate taxpayers must pay 40 per cent. Although those who do not declare their offshore accounts can avoid paying tax altogether, they would be doing so illegally.

Savers who have failed to declare their foreign bank accounts could be in for a nasty surprise when their information is handed over to HM Revenue & Customs.

The Revenue will demand payment of all tax owed on the accounts over the past 20 years, plus interest. It will also levy a fine of up to 100 per cent of this sum. Savers who come clean about their accounts can earn a 10 per cent discount on their fine, but offenders who fail to declare all their offshore interests when quizzed by the Revenue could face charges of tax evasion, which could result in a prison sentence.

All UK domiciles must pay tax on any interest that they receive on savings accounts, whether they are offshore or not. Anyone who was born and is resident in the UK, and whose father was also born in the UK, is considered to be UK domiciled.

The determination of the Revenue to clamp down on tax evasion by offshore account holders was underlined last month, when it admitted that it had recruited more staff to its specialist Offshore Fraud Group, which investigates UK residents who fail to declare offshore accounts.

Savers who are not eager to share their details with the Revenue do have a let-out clause, but they will still have to pay tax. Several countries, including Belgium and Austria, have opted out of the EU agreement. These states, along with some non-member states, including the Channel Islands and Switzerland, have devised a scheme under which investors who do not want their details to be disclosed to the tax authorities will pay a retention tax starting at 15 per cent and rising to 35 per cent in 2008.

However, offshore banks say that, so far, the response to the new rules has been more muted than they expected. Simon Hull, managing director of Alliance & Leicester International, says: “Far fewer people than we anticipated have shut their accounts. Only about 3 per cent of savers have withdrawn their money.

“The majority of customers in the Isle of Man, where investors can choose to have their information passed on to the Revenue or opt to pay a withholding tax, have opted to disclose their details to the taxman.”

Despite their reputation, offshore accounts are not just a haven for money that savers want to put beyond the reach of the taxman. Jonathan Spring-Rice, international adviser at Towry Law, an independent financial adviser, says: “Although the new directive may come as a blow to taxpayers who haven’t told the Revenue about their accounts, offshore accounts are still useful for people who who don’t pay tax because they are non-domiciled in the UK, or people who want euro or dollar accounts, which are not widely available onshore.

“Those who want to control when they pay their tax can also find offshore accounts useful. This is because they can pay tax at the end of the year when they file their tax returns.”

Yorkshire Building Society pays 5.1 per cent on its 15-day notice offshore account, while First Active Bank pays 5 per cent on its 60-day notice account. However, investors will earn these levels of interest only if they deposit £10,000 or more into the account.