According to HMRC, Geoff and Diana Jones, owners of a small IT consulting company, had sought to illegally reduce their tax bill by allocating income and dividends to the less active partner in the business to take advantage of their tax allowance and lower tax rate. The company was subsequently landed with a tax bill totalling £42,000.

However, overturning an earlier ruling by the High Court, a three member Court of Appeal panel ruled last week that the tax department had pushed its interpretation of the law too far, and stated that the couple's remuneration arrangements did not constitute pre-planned tax avoidance.

Mr Jones generated £91,000 in fees in the tax year investigated by the Inland Revenue, paying himself around £7,000 in salary while his wife received around £4,000 in salary. The rest, after expenses and corporation tax had been subtracted, was distributed as a dividend split between himself and his wife, who owned a half share in the company.

Welcoming the judgment, Simon Juden chairman of the Professional Contractors Group (PCG) which has supported the couple throughout the case, remarked that the ruling was "the best Christmas present for the UK’s small family businesses".

"It means proper recognition for the hundreds of thousands of people who choose to run their own businesses, share the burdens and the hard work with their partners, and rightly expect to share the profits of their efforts," Dr Juden observed.

"We hope that the Government will scrap the uncertainty, unfairness and inconsistency of legislation like this, which meant that the goalposts suddenly moved for thousands of small businesses. We hope this marks the beginning of a fairer approach to tax on small businesses," he added.

Reflecting on the outcome of the case, a relieved Geoff Jones said that: "This is the end of three years of uncertainty for us – at one point we thought we’d lose our home. It’s been extremely stressful and we’ve been made to feel like criminals, just for running our own business. What’s more, by organising our affairs in this way, we were simply following government advice and that of our accountants."

Accountants had feared that as many as 200,000 small firms in the UK faced higher tax bills if the Revenue had won the case.

HMRC has not been given permission to appeal the ruling to the House of Lords, although a spokesman revealed in Daily Telegraph report that the department may petition the Lords to get the case heard or legislation changed.

"If necessary revised guidance will be released shortly to confirm the position for people filing self assessment returns in January," the spokesman stated.