Thousands of small firms run by husband and wife teams urgently need to find out if they are affected by a high court ruling on the way in which couples arrange their finances, the Federation of Small Businesses has warned.
The warning follows the release of the full text of the final decision in the Artic Systems Case.
The judge ruled that Geoff and Diana Jones, of Arctic Systems, could not reduce their joint tax bill by paying a smaller amount to the main 'breadwinner' - in this case, Mr Jones - and then sharing out profits equally by means of dividends. The Jones' case was part funded by the FSB.
Simon Sweetman, vice chairman of the FSB's Taxation Unit, said the ruling could affect any family business where a family member receives a share of profit from the business - either as a dividend from a family company, or as a member of a partnership - which differs from what might be paid to somebody who is not a family member for the same work.
He said: "In practice the decision will mainly affect personal service companies set up to exploit one person's skills - such as freelance writers.
"However, in theory this could affect any business. If you are unsure whether this might mean you, you should talk to your professional adviser.
Mr Sweetman said that small firms that fall into the personal service category may need to make changes to their tax returns for the year 2003/4 to reflect the decision. Last year's returns are still open for amendment.
He said: "If a small business still wants to pay dividends then one possibility would be to adjust the shareholding to a level that equates to the input of the shareholders - that will depend on the facts in each case, but one could take the view that where it is 75/25 or 80/20 it is unlikely to be challenged in most cases.
"It is still not entirely clear what small businesses should do and HM Revenue and Customs and the accountancy bodies must offer further advice on this as soon as possible."