A proposed government crackdown on income-splitting could cripple small family firms, according to tax advisers.

Husband-and-wife companies and other firms face paying a combined £485 million in extra income tax under changes announced yesterday.

The new rules will target firms that split their profits equally, even where one partner generates most of the income for the concern. Businesses will have to prove to HM Revenue & Customs that their tax arrangements are “genuinely commercial” and that the organisation would be set up in the same way if it were not a family business.

In the Arctic Systems case, the House of Lords upheld this year the legality of income-splitting, where businesses move money from one partner to another who is subject to a lower rate of income tax. The Government decided hours after the decision to ban the arrangements.

Chas Roy-Chowdhury, head of taxation at ACCA, the accounting industry body, said: “The proposals as they stand will mean that businesses which fall within the scope of the legislation will have to go through a series of hoops to demonstrate that their arrangements are as though they were unrelated third parties - much as large companies need to do. It could deter people from setting up a business together and stifle dynamic entrepreneurship.”

The Chartered Institute of Taxation said yesterday that it had “grave concerns” about the proposed crackdown. Andrew Hubbard, its vice-president, said that partners would have to prove that in business terms they were at least an arm’s length away from each other. “In theory, this might seem fair, but the reality is that family businesses do not and cannot possibly operate on a fully arm’s-length basis.”

He added: “One spouse might be the main income generator but may well be totally unable to run the business without the full support of their spouse.

“Measured purely in hours, that spouse’s input may not appear to be significant, but that is not the reality of the situation. The support of the spouse may well be the difference between the business succeeding and failing.”

The Professional Contractors Group (PCG), which represents freelance workers and the self-employed, wrote to Alistair Darling, the Chancellor, saying that the changes would create “a nightmare for family businesses”.

John Brazier, managing director of the PCG, said: “This measure will make it impossible to self-assess tax bills with any certainty. It is also deeply unfair as the Government has been encouraging people to set up businesses under joint ownership for years, but now they are hammering the people who have followed their advice. This is another kick in the teeth for small businesses in the UK.”

The ban on income-splitting will come into force on April 6 next year after a consultation on the proposals. However, some firms may face a back-dated tax liability.

Mr Roy-Chowdhury said: “You need to look back at the way the income of the business has been split in previous years. If businesses have split dividends equally, even where one partner generates significantly more of the profits, they could suffer a reassessment of the taxable income.”

At least 30,000 small companies will be affected and the Government has come under fire for increasing the income tax burden on small business and removing generous capital gains tax concessions on the sale of businesses.

A spokesman for HM Revenue & Customs said income-splitting arrangements were unfair to other small businesses.