The government intends to drive through the use of controversial tax rules to prevent small businesses arranging their tax in the same way as Arctic Systems, a spokesman for HM Revenue & Customs has said.

HMRC suffered a humiliating defeat recently in its drive to use settlements legislation to impose higher taxes on the IT conultancy, but has said that it will push through its view of the rules one way or another, including a possible court challenge in the House of Lords.

The spokesman said that the government was ‘committed to creating a fair tax system and a level playing field for all businesses’. But when asked if HMRC would need to legislate or re-write tax legislation, he refused to comment.

On 15 December last year HMRC lost its long-running battle against Geoff and Diana Jones, owners of small IT consultancy Arctic Systems. The case, a section 660A appeal, revolved around HMRC’s objection to the way the couple used their salaries and dividend payments to reduce their joint tax bill.

Simon Juden, chairman of the Professional Contractor’s Group – the body that has backed and funded the Jones’ in their case to the tune of tens of thousands of pounds – said that HMRC would pay all costs incurred, thought to be well into six figures. He added that the ‘appropriate’ way forward would be for the government to legislate.

‘Now the case is won, husband and wife companies can continue to run their businesses the way the government and the DTI advised them to in the first place. Companies will now be able to share the rewards as well as the burdens.

‘If the government wants to change the law so that businesses are caught in the settlements net then it will have to legislate in the House of Commons,’ he said.

Kevin Nicholson, UK head of enterprise and private companies and clients at PricewaterhouseCoopers, said HMRC had little choice over the matter. ‘Either they accept the ruling or bring in new legislation, but I can’t see how they will do this. They would have to come up with a new way of taxing husband and wife businesses because fiddling with the existing law would be very complicated. But it’s not obvious how they would do it.

‘The variations on who this would affect are numerous and very complicated. What if a couple lives together and own businesses together, what if the couple involved are single sex? Once you bring taxation into relationships things start getting very complicated,’ said Nicholson.