RETROSPECTIVE tax demands are being backdated by six years, causing concern among a huge number of small family businesses in the South West.

According to Old Town-based IT recruitment agency Out-source UK, recent guidance from the Inland Revenue on section 660 also known as the married couple's business tax of the Income and Corporation Taxes Act (1988), could have huge implications for the region's husband and wife businesses.

The Inland Revenue gives an example of a limited company owned by a husband and wife.

One of the parties is the major earner, but profits are paid out via dividends between the shareholders the husband and wife.

The Inland Revenue claims that this transfer of earnings from the higher taxpayer to the lower taxpayer is done in order to avoid tax.

Paul Jameson, managing director of Outsource UK, explained: "Tax experts believe that the Government's new approach represents a different and harsher way of applying the existing legislation.

"We are particularly concerned about our freelance IT contractors and are warning all 12,000 on our database about the possible implications for their businesses.

"The Government's new interpretation could affect over a million businesses potentially any limited company that's owned by family members or friends.

"Unless the Government changes its approach some companies could even go bankrupt. Radio 4 highlighted a case of one IT consultant who is facing a bill for over £40,000 as a result."

One of Outsource UK's contractors, who did not wish to be named, said the new interpretation could cost him thousands of pounds.

His business is set up as a limited company and his wife, as a shareholder, receives a dividend even though she does not work. The businessman reckons that he could have to pay tax at a higher rate, which could cost him as much as £5,000 a year.

Mr Jameson added: "The Government really needs to address this problem urgently.

"The Paymaster General has already been urged not to backdate the new interpretation of the legislation.

"Meanwhile, any freelance IT contractors who are concerned should contact us and we will try to help them to see whether their business could be affected."