The landmark decision, handed down by Revenue special commissioners today (Wednesday), backs up the Revenue's decision to hand Arctic Systems, an IT consultancy run by Geoff and Diana Jones, a huge tax bill based on yo-year old legislation.

The ruling has serious repercussions for thousands of similar companies. Dave Smith, of Accountax Consulting, described it as 'arguably the most important tax case of the last 20 years' and said an appeal has not been ruled out.

The shock verdict was announced by the Professional Contractors Group, which has supported the couple in their fight against the Inland Revenue.

PCG chairman Dr Simon Juden said the result 'adds to the uncertainty and confusion surrounding the taxation of family businesses' because the decision was not unanimous. 'If two highly expert commissioners of tax cannot agree on a case such as this, it is hard to see how a small business is properly to assess its own tax bill.

He said he was 'naturally deeply disappointed' at the outcome of an 'important' case. Juden added that he was 'concerned' about the implications for other family businesses, consultancies and partnerships.

'We believe the current application of Section 660A to be incompatible with the concept of Self-Assessment, and the principle of independent taxation of spouses. This result is bound to make a lot of people think twice about spreading their wings and starting a family business.'

Juden added that the PCG was 'determined to achieve clarity' and that it was 'urgently seeking expert legal advice and examining possible next steps'.

Section 660A is wide-ranging form of taxation that has existed since the 1930s. It deals with situations where income arises from areas such as shares that are given by one person to another. This is called a 'settlement' with the aim of the legislation being to prevent people settling their income on another person who pays tax at a lower rate.