A crisis hitting small businesses could be eased if the Government used one of its taxes to help.

The Federation of Small Business (FSB) is calling on the Treasury to use the revenue from insurance premiums tax (IPT).

Small businesses are facing 500 per cent increases in their insurance bills as the cost of premiums rockets. Many are also finding it impossible to obtain employers' liability insurance, which is a legal requirement.

The FSB warned many small firms were facing a stark choice - either trade illegally or shut down.

The Treasury estimates it raised £1.9 billion from IPT in the last financial year with the same figure predicted for 2002/2003.

With premiums rocketing, there will be an equivalent rise in IPT making the estimate very conservative.

The FSB proposes in 2002/2003 any IPT take more than the projected £1.9 billion should be used to provide a pool of employers' liability insurance backed by the Government.

The Treasury backs insurance cover against the risk of terrorist attacks under the Pool Re system, which was set up a decade ago.

The system was extended to airlines last year when the cover became unaffordable.

FSB chairman John Emmins said: "The Treasury said there needed to be clear evidence of the insurance market failing before the Government intervenes as it did for the airline industry after September 11.

"We believe this situation has been reached as small firms are being forced to trade illegally.

"The Chancellor should demonstrate his commitment to Britain's 3.7 million small firms and act now."