The Treasury has succumbed to sustained pressure from big business and agreed to water down controversial proposals to change the UK corporate tax regime.

Several big multinational British companies had said that they were prepared to move their headquarters from the UK amid concerns that the Treasury was preparing to tax the profits they derived overseas.

A Treasury spokesman confirmed yesterday that the department had drawn up a new set of tax plans after extensive consulation with UK companies. The move will be seen as another embarrassing government climbdown.

The spokesman said that new proposals would be put out to consultation in mid-June, with a view to introducing legislative changes next year.

“We've listened and we've debated the proposals with business in some detail and we have moved a fair way from where we were last year,” he said.

The Government proposed changes to the UK corporate tax system last summer, after lobby groups said that the regime needed to take account of the multinational nature of modern business. But several large firms were angered by the plans and said that they would quit the UK for tax purposes and relocate to lower-cost tax locations such as Dublin and Geneva.

Central to their worries was the suggestion that the Treasury would make foreign profits taxable, whether or not they were repatriated.

Sir Martin Sorrell, the chief executive of WPP, threatened to move the advertising giant offshore, following a lead set by Shire, the pharmaceuticals business, and United Business Media, the publishing group.

Other companies looking at moving their headquarters outside the UK for tax reasons include Aberdeen Asset Management, the fund manager, and Brit Insurance and Chaucer, the Lloyd's of London insurers. Smith & Nephew, the medical equipment firm, and Old Mutual, the insurance and fund management group, have both refused to rule out a departure.

Hugh Osmond, the businessman behind Pearl Assurance, raised the prospect over the weekend of a mass exodus of British serial entrepreneurs.

Business leaders have argued that the tax proposals were the latest perceived anti-business slight that have wrecked the Government's relationship with industry and commerce. After Alistair Darling's changes to capital gains tax and the furore over a levy on “non-dom” foreigners, the Government is seen by many executives as no longer friendly to business.

It is understood that the Treasury will propose that British companies' foreign dividends will be exempt from tax, but it may look at other measures to tighten the tax regime. One area being considered is the taxation of intellectual property (IP) rights. Some British companies register their IP in locations such as Switzerland, while generating profits from them in the UK.

Treasury sources said that the Government would move ahead with legislation only if it had secured the broad agreement of business and would not rule out abandoning the proposals.

It is expected that the Treasury's working group on business taxation will play a central role in any consultations. It emerged yesterday that Adam Lent, the head of economics and social affairs at the TUC, will have a seat on the working group alongside finance directors and corporate executives.

The TUC argues that most UK businesses pay far less in corporation tax than the statutory 28 per cent, with the average standing at 22 per cent. Last week it emerged that British American Tobacco paid no UK corporation tax despite declaring pre-tax profits of more than £3 billion last year.

Mr Lent said that he had not seen the revised Treasury proposals and could not comment on specifics.

However, he said: “The Government and the forum must take a detailed and forensic look into some of the claims being made in the City about the implications for commerce of these reforms before rushing to amend some of the changes that are already being put in place.”