SMALL family-run companies in Bolton could now face backdated tax bills of tens of thousands of pounds after the Inland Revenue won a test case.

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

The issue centred on section 660 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 Revenue claimed Mr Jones had moved income that he should have been taxed on at 40 per cent to his wife, who pays a lower rate. It applied the rule retrospectively, and sent a bill for £42,000. In a landmark decision last week, the court ruled in its favour.

The Revenue said it was now "considering" the ruling before its next step, but many experts now fear small businesses will be hit for retrospective tax bills totaling £1 billion.

Section 660 is a highly controversial interpretation of a 1930s law by the Revenue, which has been widely condemned by the professional bodies, who argue that there is no way for businesses to calculate whether they are liable, or how big the bill will be.

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. Many family-run businesses could now face large tax bills that, in cashflow terms, could threaten their very existence." Ian Bingham, a tax partner at Manchester business advisers PKF, said: "The ruling is a real setback for family businesses and a valuable landmark victory for the Inland Revenue. It has effectively been given a green light to challenge small businesses under Section 660.

"Companies should be under no illusion that they too could soon face investigation and some will be hit with backdated tax bills running into thousands of pounds."

Mr Bingham added that the cost of bringing a case to court and subsequently losing the fight would discourage other similar appeals. He said: "Most small businesses simply can't afford to take a stand against the Revenue."