SMALL family-run companies in Bolton are anxiously watching a test case which could cost them tens of thousands of pounds in back-taxes.

The Inland Revenue has taken husband and wife team Geoff and Diana Jones -- who own a small Sussex IT consultancy Arctic Systems -- to court, claiming the company owes £42,000 in taxes dating back six years.

If the Inland Revenue is successful, it could mean thousands of small family firms being hit with similar demands, amounting to millions of pounds.

The issue revolves around sections 660a to 660g of the Income and Corporation Tax Act 1988, the so-called "married couples business tax", which deals with the transfer of assets from one partner to another. It came into force three years ago.

The Inland Revenue claims Mr Jones has moved income that he should have been taxed on at 40 per cent to his wife, who pays a lower rate.

Alan Robins, head of Bolton law firm Keoghs' Company Commercial department, said: "We frequently come across this husband and wife salary arrangement, where dividends are used to make up the wife's salary, making use of her personal tax allowances.

"It is a widely accepted practice, and we often include this arrangement in shareholder agreements. If the Inland Revenue is successful with this case, many family-run businesses could face large tax bills that, in cash flow terms, could threaten their very existence."

Accountancy professionals have criticised the rule, arguing that there is no way for businesses to calculate whether they are liable, or how big the bill will be.

Ian Bingham, a tax partner at Manchester business advisors PKF, said: "This has always been a legitimate course of action for family-run businesses and husband-and-wife teams.

"The Inland Revenue has always been aware of this.

"Businesses should be aware that, if the Inland Revenue gets its way, they could soon be accountable for up to six years worth of backdated tax payments.

"The Government has behaved inconsistently and unfairly. Its zero per cent Corporation Tax relief policy created thousands of new small and medium-sized companies as sole traders took advantage of significant tax savings by applying for corporation status.

"The Government was nave not to predict that this would happen and consequently made a rod for its own back. It is now attacking the very people it was once keen to encourage."

A decision in the Jones case is due in six weeks.