Business leaders have welcomed a government climbdown on the taxation of companies' foreign profits, but said that there was still more work to do before both sides could reach an agreement that would pave the way for a new tax policy.

The Treasury outlined its reversal on its controversial tax proposals in a letter sent to the CBI and made public yesterday. Jane Kennedy, the Financial Secretary to the Treasury, said that the Government planned to make dividend payments on foreign profits exempt from UK tax. She said that plans to police the exemption would be dropped in the existing form.

However, she said that the cost to the Treasury, estimated at hundreds of millions in potential lost tax take, meant that firm proposals could not be drawn up in time for next year.

“Based on these estimates, my current view is that the fiscal risks are too great to enable us to introduce a dividend exemption in next year's Finance Bill,” she wrote.

The CBI, the employers' group, welcomed the Treasury's willingness to rethink the issue, which sparked outrage among leading corporations and prompted fears that companies would quit Britain for tax purposes.

Richard Lambert, the CBI Director-General, said he looked forward to further consultation on the matter. “This is a particularly important issue for internationally mobile businesses, many of which have increasing flexibility on where to locate,” he said.

However, the CBI suggested that the retreat should take place sooner than the Government plans and that fresh proposals could be prepared in time for next year's Finance Bill.

Mr Lambert, who has been a campaigner on tax worries for business, added: “Much work is still needed, but this needs to be pushed forward with the minimum of delay. Business still hopes that the proposals can be included in the 2009 Finance Bill.”

Stephen Hadrill, director-general of the Association of British Insurers, a lobby group for the insurance and fund management industries, also gave a cautious preliminary welcome to the Treasury U-turn yesterday.

In a letter sent to Alistair Darling, Mr Hadrill wrote: “We believe the initial proposals were over complex, increasing the burdens on business and opportunity for revenue rising.

“We are keen to work with you to find a better way to modernise the current regime, in a way that encourages global industries to remain or invest in the UK.”

The Treasury's initial consultation, published last year, prompted a rush of anger among British businesses worried that profits made overseas might be taxed for a second time in the UK.

The Treasury has relented under the pressure of a fierce campaign from business. Treasury sources now insist that it will not modify its tax rules without a consensus from business.

On the move?

Alliance Boots Moved holding company to Switzerland
Shire Moved HQ to Irish Republic
United Business Media Moving
WPP Considering moving
Compass Considering moving
GlaxoSmithKline Considering moving
British American Tobacco Considering moving
Diageo Considering moving
Smith & Nephew Considering moving
InterContinental Hotels Keeping its UK location under review