British tax payers who thought that they could get away without paying tax on monies deposited in off-shore accounts in places like the Channel Islands, the Isle of Man and in Switzerland, are in for a shock as revolutionary new rules governing European cross-border bank accounts came into force on July 1st.

The rules strike at the age-old tax avoidance practice of keeping your money in a foreign bank account, and illegally failing to report the interest you receive - but a London firm of chartered accounts is calling for an amnesty.

Steven Bruck, of London chartered accountants Blick Rothenberg said, "It is right and proper that the new rules are put in place as the government loses millions every year from this sort of avoidance."

But Bruck also points out, "The fear of penalties and prosecution will cause some to seek uncontrolled tax havens further afield, or to employ schemes to bypass the new rules by the use of off-shore companies to make such deposits. The offer of a tax amnesty would encourage those with off-shore accounts to bring their monies home."

From 1st July the European savings tax directive requires 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. 75% of the tax so collected will come to the UK Treasury as an aggregated sum.

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 will increase from an initial 15% to 35% by 2011.

Steven Bruck added: "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 a field 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."

Bruck said that it was understandable that the European tax authorities wished to eliminate a serious drain on their income, which ultimately adversely affects all law-abiding taxpayers.

He said: "This is another example of ever increasing European tax cooperation and integration which continues whilst the politicians bicker."

He added: "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."