It is amazing how quickly a concession to encourage enterprise can become a loophole, said the Federation of Small Businesses taxation unit spokesman, Simon Sweetman.

The move would hit businesses such as small family-owned printers hardest.

BPIF director of corporate and external affairs Cicely Brown said the tightening of taxation was one of the most contentious items in the budget.

However, she said it was unlikely to have a huge impact on businesses with profits of more than 10,000.

A zero corporate tax rate was introduced in 2002 for companies with profits of less than 10,000.

This provoked a rush of self-employed individuals to incorporate in order to take advantage of the tax break.

This meant that a sole proprietor could take 15,000 out of their business almost tax-free by redistributing the profits as dividends.

The BPIFs Brown said only small companies that had taken advantage of this loophole would be some 2,850 per annum worse off.

But it could lead to a reduction in the amount of small businesses being incorporated.

Any profits up to 10,000 that are reinvested in the business will continue to remain exempt.

Story by Andy Scott