THOUSANDS of small firms run by husband and wife teams need to find out if they are affected by a high court ruling on the way in which couples arrange their finances, the Federation of Small Businesses (FSB) has warned.

The warning follows a judge's ruling in a case part funded by the FSB, that a couple could not reduce their joint tax bill by paying a smaller amount to the main breadwinner - and then share out profits equally by means of dividends.

Simon Sweetman, vice-chairman of the FSB's Taxation Unit commented: "The ruling could affect any family business where a family member receives a share of profit from the business (either as a dividend from a family company, or as a member of a partnership), which is different to what might be paid to somebody who is not a family member for the same work.

"In practice the decision will mainly affect personal service companies set up to exploit one person's skills - such as a freelance writer, but where the shares in the company are held by that person and their spouse and substantial dividends have been paid.

"If you are unsure whether this might mean you, you should talk to your professional adviser.

"Small firms that do fall into this category may need to make changes to their tax returns for the year 2003/4 to reflect the decision.

"Last year's returns are still open for amendment.

"If a small business still wants to pay dividends then one possibility would be to adjust the shareholding to a level that equates to the input of the shareholders: that will depend on the facts in each case, but one could take the view that where it is 75/25 or 80/20 it is unlikely to be challenged in most cases."