The Government is proposing tax changes aimed at reducing the fear of dealing with Inland Revenue for thousands of small businesses.

Associate Revenue Minister Paul Swain yesterday released a discussion document - More Time for Business - which seeks submissions on options for simplifying the tax process for small businesses.

The main proposals, which would be optional and apply only to firms with a turnover of less than $1.3 million, are:

* A pay-as-you-go scheme where a business pays a withholding tax as income is earned, rather than in three equal provisional tax payments through the year. The payments, monthly or bi-monthly, would rise and fall with the firm's cash-flow and could be linked to GST payments.

* Employers could reduce the risk of falling foul of the penalties regime by using intermediaries such as payroll firms to handle their PAYE. Provided a firm paid over the gross wages in good faith and on time, liability for mistakes would rest with the payroll firm.

* Firms would be allowed to pool provisional tax payments with other businesses, through an intermediary such as a bank. The idea is that the interest charged on underpayments and paid on overpayments would be closer to normal commercial interest rates, avoiding the current wide differential.

"New Zealand is a country of small businesses. More than 95 per cent of employers have fewer than 20 employees, and 84 per cent have fewer than five employees," Mr Swain said.

"The vast majority of small businesspeople are keen to pay their tax, but live in fear that they will make a mistake and end up being charged penalties and interest. "

Tax experts and business advocates agreed that the document was a good starting point. But they said the proposals outlined were not earth shattering and their impact would vary across businesses.

Commenting on the range of options offered for small businesses to consider paying PAYE and provisional tax by using an intermediary such as a bank or a payroll firm, Auckland Chamber of Commerce chief executive Michael Barnett said care would be needed to ensure these options were clearly explained and did not add to compliance costs.

"The discussion needs to consider whether it will be helpful for small businesses to be able to select a single option on the method of paying tax, and who will pay the costs associated with the option chosen."

Mr Barnett said linking PAYE and GST payments was a common sense proposal, which Australia already had.

Part of the discussion would need to be whether the definition of a small business for tax purposes of $1.3 million turnover should be broadened.

Jeff Owens of the Institute of Chartered Accountants said the proposals were further evidence of the Government's commitment to simplifying the tax system.

"An important and positive feature of these proposals is that taxpayers will have a choice in the way they pay their tax," he said.

"The Institute believes that this will help reduce compliance costs and exposure to penalties, interest and some cashflow risk."

Deloitte Touche Tohmatsu tax partner Thomas Pippos said the provisional tax and pooling proposals were novel but not earth-shattering.

"The real issue is how many people will benefit from it. The devil is always in the detail," he said.

He said the provisional tax payment proposal could hinge on the willingness of banks to provide the necessary services, as the Government would not force them.

Mr Swain said banks had expressed interest in the proposals but remained non-committal until the details were clearer.

Businesses would nominate their own rate for the withholding tax to replace the three current provisional tax payments.

They would be able to adjust the rate if they thought it no longer correct.

Asked why they should not just set up a similar automatic arrangement to peel off the same proportion of their income into a separate bank account that would earn them interest, instead of paying the IRD early, Mr Swain said the interest foregone had to be weighed against the comfort of putting the money out of reach and thereby reducing the risk of having a tax problem at the financial year-end. The closing date for submissions is 15 June.

More Time for Business