Small family businesses are braced for a half a billion pound tax grab as the government cracks down on Arctic Systems-like structures.

In a move that is likely to alienate tens of thousands of small businesses, the government said it would go ahead with the plans to tackle 'income-splitting', but did not say exactly how.

The Arctic Systems battle has wound up HM Revenue & Customs, who fought the case all the way to the House of Lords, despite it only concerning £6,000 of tax. Having lost, the government now plans to introduce legislation.

'I'm fearful of how it will end up,' said Richard Mannion, national tax director at Smith & Williamson. He said if taxing such businesses was easy, the government would have done it years ago.

'Where will the Treasury draw the line? It's about the value of [a person's] contribution to the business, I don't know how they will solve that [in legislation],' said Anne Redston, visiting professor at Kings College London.

The legislation is likely to create limits on the type of income family members carrying out 'back-office' work can receive, said Bill Dodwell, head of tax policy at Deloitte.