Millions of family-run businesses could be forced to pay thousands of pounds in unclaimed taxes if the Inland Revenue wins a test case.

The case involves husband and wife Geoff and Diana Jones, who own Arctic Systems, a small computer consultancy in Pulborough.

After three days of legal hearings in London the couple, who are being backed by Arundel and South Downs MP Howard Flight, face a six-week wait for a judgment.

Initially they faced a £42,000 bill, backdated over six years, but the Revenue dropped this following a purported technicality.

The couple now face a much smaller bill but others finding themselves in the same position might not be so fortunate.

The issue at stake is whether it is right for Mr Jones to pay himself and his wife largely through dividends instead of a salary.

Mr Jones generates most of the income while his wife administers the company. By paying a dividend out of profits and steering some of the husband's income to his wife, the couple have been able to reduce their tax bill.

The Revenue asserts the dividend was a device for switching income from an earner to non-earner and was taxable.

Businesses that could be affected by the case are largely small, family-run companies. Those running them usually draw a low salary. They pay themselves through dividends and pay tax at lower rates.

The issue first raised its head last year when Mr and Mrs Jones's case came to light. Accountants accused the Revenue of resurrecting anti-avoidance tax legislation dating back to the First World War to target dividend payments of spouses.

The Professional Contractors Group (PCG), representing Mr and Mrs Jones, claims this is the first hearing relating to the 70-year-old S660A rule.

However, the Revenue denied it had changed its policy or practice. It said the legislation treated the income as belonging to the person who transferred it rather than the recipient.

PCG chairman Simon Juden said: "The PCG is firmly of the belief that if families share the risks of setting up and running a business, then they should share the benefits and we do not believe it is the Government's intention to dissuade people from playing a vital role in the local and national business community."

Conservative MP Mr Flight said: "This is a very important test case for small businesses that the Inland Revenue deserves to lose."

Friday June 18, 2004