New data has revealed a 20 per cent drop in the number of new companies being formed.

The fall was blamed by accountants on a small business tax introduced in the March Budget by chancellor Gordon Brown.

The tax lessened the previously generous tax advantages for small company owners.

Howard Flight, the shadow chief secretary to the Treasury, said: "It is an illustration of the government’s incompetence. Not so long ago it was encouraging small business owners to incorporate through tax breaks. Now it has seen how much it is costing so it does a U-turn and takes them away. It is simply bad government."