The Government was today urged to launch a review into the tax rules and regulation of public services because of fears that its reforms were being "undermined".

The CBI warned that the success of the reforms was being put at risk because public procurement rules discriminated against private firms, voluntary organisations and even the public sector.

The business group said current rules provided "perverse incentives" to avoid tax, adding that a full inquiry was needed to stop improvement in public services being held back.

John Cridland, deputy director general of the CBI, said: "The Government is risking the future success of its reforms because we will not achieve the full potential if we leave the issue of competitive neutrality unresolved.

"It leaves a shaky foundation under the Government's reforms."

Mr Cridland said private firms, the public sector and voluntary groups had all made complaints about the system under which they compete to run public services.

The CBI said in a report, A Fair Field and No Favours, that some organisations were being given an unfair advantage over the purchase and provision of services.

The report said there were "major inconsistencies" in the way in which government regulation and corporation tax, business rates and VAT applied to public, private and voluntary providers.

Mr Cridland added: "There is a real danger that providers will create structures for artificial reasons to get around arcane rules governing market entry, rather than creating partnerships that add public value."

The CBI claims that the warning was clear: current rules provided perverse incentives to avoid tax and may prevent effective reforms to the UK's public services.