Gordon Brown closed a tax loophole for self-employed people two years after he created it, in a U-turn that infuriated small businesses.
The chancellor in the 2002 Budget set up a zero rate of corporation tax for companies with taxable profits below Ј10,000.
The change led thousands of self-employed people to set up as companies and take advantage of the tax break. They could pay themselves the tax-free personal allowance of Ј4,615, then the rest in dividends, also escaping tax for profits up to Ј10,000.
Dawn Primarolo, pay-master-general, told a Commons debate in 2002: "Surely small businesses will not look a gift horse in the mouth."
The Institute for Fiscal Studies, a public finance think-tank, said Mr Brown budgeted for the zero rate to cost Ј20m in 2002-03 and Ј265m in 2003-04. However, it could cost the government Ј1bn a year in lost revenues, the IFS said.
