Revenue & Customs has been holding secret talks with banks in an attempt to coax them to shop customers who have failed to declare tax on offshore income.

If it cannot persuade the banks to do this voluntarily, it is expected to take legal action in the next few months to force them to hand over information.

It is not illegal to hold money offshore, but it is against the law to conceal the interest earned. Savers caught doing this could face a payment order for the tax due plus interest, as well as penalties that can be up to 100 per cent of the amount owed.

The Revenue is believed to be considering an amnesty for offshore account holders to encourage people to come forward. During an amnesty, penalties would be reduced to between 10 per cent and 25 per cent of their maximum level.

But accountants say taxpayers shouldn’t wait for an amnesty to come clean, as there is no guarantee it will be implemented.

Last week, the Revenue refused to confirm or deny whether an amnesty is imminent. The scheme requires government clearance and the Treasury may be unwilling to give it because it needs to plug a £3.6 billion hole in the public accounts.

Accountants therefore urge offshore account holders to own up about undeclared funds. People who approach the Revenue and co-operate with its inquiries can usually negotiate lower penalties.

Mike Warburton at Grant Thornton, an accountant, said: “Penalties are usually greatly reduced if you come clean. The best advice is to own up because it is only likely to get worse if you hold out and are discovered.”

Banks have not traditionally had to disclose details of customers’ accounts, although the EU savings directive and a landmark case last year against Barclays have eroded this principle.

Under the savings-tax directive, introduced in July 2005, most EU states now share information about people who earn savings income in their country but live elsewhere. So if a UK resident has an account in France, the French authorities will share information with the Revenue.

However, Austria, Belgium and Luxembourg and the offshore centres of the Channel Islands, the Isle of Man and the British Virgin Islands implemented the directive differently. Rather than share customers’ information, they levy an annual withholding tax on savings income if the saver lives in another country. Customers can avoid the tax only if they prove they are not liable in their home country, or if they authorise the bank to share information with the relevant authorities.

The Revenue cannot automatically get access to information about bank accounts in these countries, but can be given the go-ahead by a special commissioner of the Revenue. Last May the Revenue won a landmark ruling that forced Barclays to hand over records of thousands of customers with offshore accounts. Revenue & Customs estimates that this first inquiry will yield about £1.5 billion in unpaid tax from Barclays customers.

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