Alistair Darling has been accused of bowing to pressure from the super-rich after he sought to reassure foreigners living in Britain worried about his plans to close their tax loopholes.
The Chancellor tried to calm fears in the City that there could be an exodus of wealthy business people from Britain if he goes ahead with his proposed clamp down on "non-domiciles".
He promised the non-doms that they would not have to disclose their worldwide income if they paid a new £30,000 a year charge, which would take effect after they had lived in Britain for seven years.
The Tories claimed that Mr Darling had made a "massive retreat" and changed his policies. But ministers insisted they were "clarifying" their plans to avoid misunderstandings.
The confusion over the Government's stance will add to the pressure on Mr Darling, who has also angered business leaders over his reforms to capital gains tax, on which he has also staged a partial retreat, and his handling of the Northern Rock crisis.
His latest line on the non-doms now risks alienating Labour MPs and the trade unions, who fear he has bowed to pressure from some of the richest people not to threaten their tax perks.
Yesterday, one of Britain's wealthiest residents, Dermot Smurfit, the Irish paper tycoon, threatened to move to Monte Carlo or Switzerland because of the Treasury's proposals.
"I have contributed huge amounts to the country and pay significant taxes, about £150,000 a year. If they bring these changes in, it's goodbye, thanks very much. They would end up with nothing," he said.
Sir Michael Savory, a former Lord Mayor of London, admitted there was some "sabre rattling" but warned: "If we are moving to a high-tax regime, as we are at the moment, they will migrate – to Dubai, Hong Kong, Singapore."
Yesterday, the Treasury defended the proposed £30,000 annual levy while seeking to allay fears that its clamp down would be more wide-ranging.
It announced that there would be no retrospective treatment of offshore trusts, as had been widely expected by tax experts, and the tax changes would not apply to gains made before they took effect.
The Treasury made clear that money brought into Britain to pay the £30,000 charge would not be taxable and that art works could continue to be imported for public display without incurring tax. It also promised more talks with the United States authorities aimed at allowing US citizens to offset the charge against US tax.
Yvette Cooper, the Chief Secretary to the Treasury, admitted: "We have completely recognised that a lot of people have misunderstood the intention behind the policy we want to introduce." She added: "We don't need to know the detail of people's worldwide income if they are going to pay the £30,000."
The Treasury's move did nothing to cool the heated political row about the non-doms. The Tories, who pre-empted Labour by proposing a £25,000-a-year levy in October, said Mr Darling had made "significant climbdowns" and accused him of blaming a junior HM Revenue & Customs official for drafting errors in its original proposals.
George Osborne, the shadow Chancellor, said: "In his time at No 11, Alistair Darling 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."
Vince Cable, the Liberal Democrats' Treasury spokesman, said: "There has been some outrageous special pleading from the City with wildly exaggerated accounts of the damage that would be done by taxing non-domiciled residents. British taxpayers do not understand why they should pay 40 per cent top rate tax, while the super-rich may pay little more than council tax on houses worth tens of millions."
The unions urged Mr Darling to scrap all tax perks for non-doms – which could raise £4.3bn. In a letter to the Chancellor, the TUC general secretary, Brendan Barber, said: "Ministers should not swallow the line that this move will hit business or the nation's prosperity. If the super-rich can get away with treating tax as largely optional then it corrodes trust in the system."
Former minister Frank Field has called for a 10 per cent tax rise for people earning more than £150,000 a year, which could be offset by charitable giving.
Some of the multimillionaires who could be affected
* Lakshi Mittal – Indian-born steel magnate: £23.5bn
* Roman Abramovich – Russian oil tycoon and owner of Chelsea FC: £7.5bn
* Hans Rausing – Swedish packaging heir: £4.5bn
* Charlene de Carvalho-Heinkeken – Dutch-born brewing heiress: £3bn
* Sri and Gopi Hinduja – Indian brothers with global business empire: £2.1bn
* John Fredriksen, fifth from right – Norwegian shipping magnate: £1.8bn
* Philippe Foriel-Destezet, centre – French recruitment agency tycoon: £1bn
* Naresh Goyal – Indian entrepreneur and founder of Jet Airways: £500m
* Anil Agarwal – Indian-born metals and mining magnate: £1.4bn
* Björgólfur Thor Björgólfsson – Icelandic owner of West Ham United FC: £700m
* Dermot Smurfit – Irish paper tycoon: £500m
* Noam Gottesman – US hedge fund manager and art collector: £220mReuse content