Thousands of family run firms could face higher tax bills following a landmark test case involving the transfer of company dividends from husband to wife.

In April, the High Court ruled in favour of HM Revenue & Customs (HMRC) in a case involving husband and wife team Geoff and Diana Jones who run a small IT consultancy, Arctic Systems.

Last year the HMRC decided that Mr Jones had unfairly transferred some of his income, by paying his wife dividends on the shares she owned in their jointly owned company, to his wife to benefit from her lower tax bracket. HMRC ruled that she should be taxed at the same rate as her husband.

The couple went to court – but lost – and now HMRC is to use the ruling as a test case. Many small family-run businesses have similar tax arrangements to Mr and Mrs Jones, often because they were advised to set up a company through which to trade by their accountants. The HMRC had never interpreted a law which went back decades against such arrangements before so people thought such a company was a legitimate legal tax avoidance method

Just how many family firms will be affected is still open to question. Some argue that the case is fairly extreme – because Mr Jones was effectively the sole fee-earner in the company but drew a salary of only £7,000, from a turnover of £91,000, while his wife was paid £4000 for four hours work a week. The remaining £60,000 was shared equally in dividends.

It is likely that the precedent will be restricted to those companies where there is only one main fee earner. Anything from 30,000 up to 200,000 companies could be affected.

If you are concerned about the implications for your own tax arrangements we advise you to take expert legal advice immediately. Our solicitors are on hand to help guide you through the complex tax and legal issues of this case.

In the meantime, it is possible that the couple could take their case to the Court of Appeal.