FARMERS WHO have given wives or relatives a share in the business to avoid paying tax have been put on notice following a legal victory by the Inland Revenue.

The ruling, which relates to an information technology firm, will prevent principals in a business from avoiding tax by distributing earnings to lower-rate tax payers, and could net the Inland Revenue £1bn, according to newspaper reports.

Husbands and wives who both receive remuneration from family firms will be treated as if all the income was from the main contributor, thus preventing the other making use of their personal allowance and lower rates of income tax.

But Richard Crane, partner with accountant Deloitte, said there was no need for farmers to panic.

“There are plenty of situations where spouses do contribute significantly, so farming businesses are possibly less vulnerable than other types of business,” he said.

But he accepted it would be sensible for every business to look at the justification for the distribution of earnings among family members.

“The general advice is: Your earnings should reflect your input in the business.”

Discussing the issue at the next business review would be sensible, Mr Crane recommended.