City demands a bigger retreat on non-dom tax

The Chancellor was forced yesterday to water down moves to target so-called non-doms, wealthy individuals who are not registered for tax in the UK.

The change was the second major U-turn by Mr Darling in less than a month, coming weeks after he amended plans to reform capital gains tax.

In what appears to be a glimmer of hope for the City, the Treasury stressed the details of the whole proposals were "still out for consultation". Business leaders claimed the latest concessions on non domiciles - that Britain will not pry into the source of foreigners' offshore accounts - were "too little, too late".

Estate agents warned today that nondoms' fears remained undimmed and they were still preparing to sell their homes in areas such as Knightsbridge and Mayfair. Switzerland began to target the potential exodus, with Zurich and Geneva lawyers reporting an increase in enquiries from London-based individuals.

The CBI welcomed a "victory for common sense" but it joined the Institute of Directors and other groups to warn that Mr Darling now needed to look again at his entire tax plans.

Miles Templeton, director general of the IoD, said the threatened exodus of businessmen from London would still go ahead unless there was a postponement of the plans set to come into force in next month's Budget. He said: "The dangers in this could be quite big if you get it wrong. What we feel very strongly is the need to delay implementation to April 2009."

The CBI attacked the last-minute, botched nature of the changes to what was a hugely complex area of taxation. The draft legislation on nondoms was not issued until 18 January, well after the pre-Budget report that signalled the reforms last October.

The CBI said: "This demonstrates why business places so much value on proper consultation on such delicate matters. The proposals were clearly cobbled together in a hurry."

The Society of Trust and Estate Practitioners said the "half-hearted" reassurances from the Treasury were "not enough to stop the capital flight and brain drain". Mr Darling blamed the "clarification" of non-dom policy on a "misunderstanding" by HM Customs and Revenue staff of the Government's intentions.

The Prime Minister is understood to have been concerned at the potential damage to Labour's image as a business-friendly party. But sources close to No10 stressed that there was no question of replacing Mr Darling with former City minister Ed Balls.

Party sources pointed out Mr Brown himself had ordered the Treasury to come up with non-doms reform to raise cash to cut inheritance tax.