The Government will this week execute a U-turn over the introduction of controversial plans to tax foreign profits in the wake of a huge business backlash.

The Treasury will tell business leaders that it will scrap all but one of its proposals, details of which were expected this month.

In the latest in a growing list of climbdowns, the Treasury will tell the CBI, the employers’ group, that it wants to continue talks on how it might deliver a tax exemption on foreign dividends as part of proposed reforms outlined last year.

However, it will drop the rest of a broader package of measures that was designed to prevent abuse of the dividend policy.

Treasury sources said the Government was committed to reforming its tax rules in a way that took account of the impact on specific industry sectors.

A range of British businesses, including WPP, the advertising group, and GlaxoSmithKline, the pharmaceutical group, had threatened to abandon the UK as their headquarters for tax purposes if the scheme was implemented.

The Times reported last month that the Treasury had conceded that it had gone too far and needed to refine its ideas. Jane Kennedy, Financial Secretary to the Treasury, said after the first meeting of a new tax taskforce that the proposal went “further than we had originally envisaged”. She added: “We’ve got some further work to do.”

The Treasury had already agreed to water down its foreign tax plan in the face of sustained pressure from corporations.

Treasury sources said last night that discussions with businesses were continuing and fresh proposals on the dividend tax would be put forward in September.

Extra time to prepare for a refined tax plan will be welcomed by international companies based in the UK.Companies including Brit Insurance and Chaucer, the Lloyd’s of London insurers, Smith & Nephew, the medical equipment group, and Aberdeen Asset Management, the fund manager, reacted furiously to the idea that overseas profits might be taxed for a second time when brought back to the UK.

Last month, the CBI called for urgent clarity on the issue.

The foreign tax spat represents the latest run-in between the Treasury and corporate Britain, which has been unsettled by plans to introduce a flat rate of capital gains tax and a move to introduce an annual levy on wealthy “non-domiciled” foreigners.