The FSB, Britain's leading small business group, has criticised the Chancellor's u-turn on small company taxation and believes that it undermines his welcome moves on payroll and inspection regimes for small firms.

Simon Sweetman of the FSB's Taxation Unit said: "It is amazing how quickly a concession to encourage enterprise can become a loophole. This move will hit ordinary family businesses hardest when it is the loopholes exploited by the rich that cost the Exchequer money.

"In the 2002 Budget, Gordon Brown announced changes to corporation tax which provoked a rush of self-employed individuals to incorporate in order to take advantage of the tax break. It is now unfair of the Chancellor to retaliate with a 19 per cent distributive tax, when this rush was entirely predictable."

"The FSB has been lobbying for an increase in capital allowances for a number of years. A 50 per cent First Year Capital Allowance is a welcome move but it will not offset the loss to small limited companies as a result of the distributive tax. We are also concerned that there was no mention of the 100pc First Year Allowance for investment in IT which we believe is vital to ensure that all UK small firms get on-line. Of equal concern is the move to increase petrol prices when transport is a key cost to small firms."