Chancellor waters down 'non-dom' tax after threat of business exodus from Britain

Alistair Darling was accused of a climbdown last night over proposals to increase taxes on foreign businessmen.

The Treasury moved to "clarify" its plans which included a £30,000 annual levy on so-called "non-domiciles".

Critics of the tax grab have warned it would prompt an exodus of talent and wealth from Britain.

Claiming draft legislation had simply been badly worded, ministers insisted they did not wish to "snoop" on the financial affairs of wealthy foreigners living here.

Treasury Chief Secretary Yvette Cooper said a proposal to tax offshore trusts as far back as 1998 would not be implemented.

"There's a whole series of things in the draft legislation, including around people's worldwide income and the approach that's taken to that, that are not the clear policy intention of the Government and have never been so," she insisted.

The Conservatives said the retreat showed that Mr Darling, who has suffered a torrid time as Chancellor, was "clearly not up to the job".

An MP close to the Prime Minister has said Mr Darling's reforms of capital gains tax had "undone ten years of hard work in winning over the business community".

Gordon Brown's aides were forced to dismiss as "garbage" claims that he intended to sack Mr Darling in his next reshuffle.

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Threatening to leave the country: Dermot Smurfit, the Irish paper tycoon, says he is considering moving to Monte Carlo if the Treasury brings in the tax changes. He is pictured with his wife

The Chancellor's allies suspect that he is being made to pay a heavy price for Mr Brown's panic response to a Tory promise of a giveaway on inheritance tax last year.

The Prime Minister ordered the Treasury to respond by offering a smaller inheritance tax concession, paid for by a levy on non-domiciled taxpayers and changes to capital gains tax.

But the Treasury has struggled to implement the Prime Minister's orders and has been attacked by the City for failing to consult on measures that are said to threaten Britain's position as a global financial centre.

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Tax haven: One of Britain's richest residents, Dermot Smurfit, is investigating moving to Monaco if the new tax rules are brought in

Ministers hope last night's assurances on the non-dom levy will close down another damaging row with business leaders.

Labour donors and the entire Greek shipping industry were threatening to quit Britain in protest.

Mr Brown and his closest Cabinet ally, Schools Secretary Ed Balls, are said to have come under intense pressure from the City - behind the Chancellor's back - for a rethink.

"Ed Balls is particularly critical of how this has all been handled," said one source.

Currently, non-doms pay tax on their UK income but not on their foreign income and gains.

Under the Government's changes, non-doms will now pay a £30,000 annual charge after living in the UK for seven years.

A study warns this levy will cost the Government £2.1billion in lost tax receipts - more than twice what it will raise - as the wealthy quit the UK.

George Osborne, the Tory shadow chancellor, said Mr Darling's "massive climbdown" showed he was not up to the job of running the nation's finances.

"In times of economic uncertainty, people need a chancellor who can demonstrate strength of leadership and consistency of judgment. With Alistair Darling, we have neither," Mr Osborne said.

"In his time at Number 11, he has gone from one retreat to another and his economic incompetence, whether on Northern Rock, capital gains tax or now non- domiciled taxation is doing real damage to the real economy.

"The question for our dithering Prime Minister is how long can he keep someone at the Treasury who is clearly not up to the job."

John Cridland, of the CBI, said the changes were a "victory for common sense".

But Stuart Skeffington, a tax partner at law firm Withers, said the retreat would not end the row because the £30,000 charge was still being applied.

Dermot Smurfit, the Irish paper tycoon and racehorse owner, said he was investigating moving to Monte Carlo or Switzerland if the changes were introduced.

Greek family-owned shipping firms today told the FT that they were planning to leave London in response to the tax crackdown.