Change of tack to win small-business goodwill

By BRIAN FALLOW

Inland Revenue is joining forces with trade associations in its bid to cast its net over the multibillion-dollar cash economy.

Commissioner David Butler was emphasising the velvet glove yesterday, rather than the iron fist beneath, as he announced "partnerships" with, initially, the Electrical Contractors Association and the Master Painters Association.

It was not a tax blitz, he said, or a dob-in-the-cowboys programme.

The aim was to achieve a greater level of voluntary compliance with the tax laws among the mass of small businesses, who were willing to do the right thing and tried to, even if they did not always succeed.

"We want to discover what the barriers to voluntary compliance are."

Ray Barbara of the Electricity Contractors Association said someone who encountered a cashflow problem after years of playing by the rules and paying tax on time tended to be treated by the IRD the same way as someone who deliberately dodged tax whenever possible.

Butler said the IRD wanted to be more helpful and more lenient to the normally compliant taxpayer who had a cash flow problem than to someone who habitually and wilfully shirked his or her tax obligations.

If it turned out that this meant legislative changes to the penalties regime, IRD would happily put it on the tax-policy agenda.

The maximum level of culpability under the penalties regime - evasion - requires the tax to be paid, plus a 150 per cent penalty and use of money interest.

Barbara said: "It is clear to us that those individuals operating in the cash jobs end of the market tend to be less reliable in terms of the quality of their work as well."

As well as putting tax-paying contractors at a competitive disadvantage, they posed a safety risk to the public, he said. "The public need to weigh the benefits of a cheaper job against a compliant job."

Butler said overseas experience suggested that industry-specific booklets on how to comply with the tax laws were effective.

The IRD was also looking at specific account managers to handle particular industries to build up specific background knowledge.

He expected that eventually some 20 industry associations would be involved in the partnership programme, which would cover a high proportion of small businesses.

Canadian Professor David Giles estimated in 1994 that the New Zealand black economy was equivalent to around 8.8 per cent of gross domestic product, which would be about $10 billion today..

But Butler noted that such estimates depended a lot on the assumptions used, citing Australian estimates that varied from 3.5 to 13.4 per cent of GDP.

Giles' work also found that reducing the tax burden (the tax to gross domestic product ratio) reduced the hidden economy, but that effect weakened below a tax-to-GDP ratio of 21 per cent.

Increasing the reliance on indirect taxes such as GST rather than income tax tended to reduce the hidden economy, too.

The chairwoman of the Institute of Chartered Accountants, Diana Pryde, welcomed the IRD's approach.

But the Government had to recognise that high marginal tax rates discouraged compliance, she said, whether it was the 39c rate for the top bracket of income tax, or the high effective tax rates faced by people moving from benefits into paid work.