New legislation designed to curb a practice widely used by family-owned and run businesses to reduce their tax bills has been criticised as unworkable and flawed by tax experts.

The legislation that is due to come into effect on 6 April would crackdown on the practice of "income splitting" where the spouse or partner plays either no role or only a limited role in the business.

John Whiting, tax partner at PricewaterhouseCoopers, explained that income splitting occurs when one individual transfers income, usually dividend income, to their partner or spouse, who has a lower tax rate, thereby reducing the business's overall tax bill.

Whiting told Recruiter that while income splitting did go on, and that small start-up recruitment agencies would be caught by it, the legislation was flawed.

Whiting argued the legislation would: increase the average tax bill of those "caught" by £3,000 a year; lead to compliance costs for business of at least £500 a year — mainly for the use of external advisers such as accountants; and create additional red tape and bureaucracy for business.

Whiting said that to protect themselves "in case the Revenue came calling", businesses would need to be able to prove that the income received by each partner or spouse was actually earned and not shifted to them for purposes of tax avoidance.

Martin Portnoy, a partner in Ernst & Young's corporate tax consulting division, questioned the practicality of the legislation in requiring businesses to value the contribution of a secondary partner to the business. "How do you put a value on strategic advice provided by a wife to the business?" he asked.

However, he advised recruiters to take the changes seriously. Otherwise, he said, they could face a hefty tax bill sometime in the future.