Caymans on collision course with Treasury

The Treasury has declined to confirm their tough line following the failure of talks earlier this week between representatives of the islands' financial administration and paymaster general Dawn Primarolo.

They were described afterwards by both sides as 'positive and constructive' and British officials stressed that 'discussions will continue'.

But the Caymans were reportedly defiant - fearing the withholding tax and disclosure provisions demanded by Brussels and London will wreck their economy.

A Treasury spokesman would only state: 'We would prefer that an agreed settlement will result from these discussions.'

The UK does not regard Caymans non-compliance as an option. All four other dependant territories that act as tax havens have declared their intention to comply - allowing any one of them to opt out would wreck the EU anti-evasion initiative.

The Caymans have offered some limited concessions as a sweetener but have been holding out for easier access to the EU financial market.