Gordon Brown in his Budget 2002 speech encouraged the many tens of thousands of small businesses to incorporate their businesses by introducing a zero rate of corporation where a company's profits do not exceed £10,000.

Incorporation greatly reduces tax burdens for small businesses because it allows them to pay corporation tax at zero per cent where profit is less than £10,000, which is then distributed to the owner as dividends, free of corporation tax and NICs.

Nearly 100,000 businesses applied to Companies House for incorporation last year alone, an increase of 43 per cent on the previous year, and applications are still flooding in at the rate of 7,000-8,000 a week.

The impact of this has been to cut the Chancellor's tax revenue just when he most needs it to make the books balance. According to the Institute for Fiscal Studies, Mr Brown budgeted for just £265m a year in lost revenue, but it has already reached more than £1bn.

That was too much for the Chancellor to bear so, from 1 April 2004, the Treasury imposed a minimum rate of corporation tax of 19 per cent on dividend payments to non-corporate shareholders.

That will leave some small business people, if they pay dividends to non-corporate shareholders, worse off than they would have been if they had never incorporated. Many might not have subjected themselves to the cost and complexity of incorporation had they known that Mr Brown was likely to make this change.

TAX FOR BUSINESS

Avoidance
New rules requiring registration of certain tax-avoidance schemes.
Specific anti-avoidance provisions to be introduced relating to partnerships, finance leases and VAT.

Rates
Rates frozen on corporation tax and the climate change levy. VAT threshold for small businesses raised to £58,000.

Allowances
First-year capital allowances increase from 40 per cent to 50 per cent for small businesses investing in most plant and machinery.