With many tax returns now overdue following yesterday's deadline, a business pressure group has labelled the system inflexible and unfair to many small companies.

The Forum of Private Business said they would benefit from a more flexible system.

Under the present set-up, individuals and businesses must pay their tax in two lump sums in January and July.

Late tax returns will attract a £100 fine, and if the tax balance is still outstanding on March 1, a surcharge of five per cent will be levied.

A further surcharge of five per cent will be charged if the tax balance is still outstanding by July 31. Returns still outstanding on this date will incur a second £100 penalty.

"It may be a trite maxim but it is absolutely true - cash is king in small businesses," said the FPB's chief executive Nick Goulding.

"So having to pay out so much cash in two big hits disrupts cash flow and can cause businesses serious problems. Businesses should be given the option to pay monthly in arrears as well as in two lump sums.

"Business rates, for example, is a tax which is paid in ten monthly sums so it can be done."

The FPB has also launched its 2006 Employment Guide for small businesses this week, against a backdrop that nearly 40 per cent of firms are not confident they are complying with current law.

The FPB's head of membership Jenny Stewart warned that all businesses employing people, regardless of size, had to comply with employment law and failure to do so risked causing immense damage and disruption, both financially and operationally.

"Our survey revealed that 17 per cent did not have contracts of employment for all staff and well over half, 57 per cent, had not updated their discipline and grievance procedures for the past 12 months,' she said.

"This church hall, amateur approach to the law is just asking for trouble. Employment law is a minefield for small firms.

Ms Stewart said an increasing number of businesses were facing disputes with staff. In 2003, there were more than 115,000 tribunal claims and many more disputes settled expensively out of court.

"Small business owners are vulnerable to being attacked by the ambulance-chasing law firms soliciting tribunal claims on a no win no fee basis," she said.

"We know running a small firm is massively time consuming, but it pays to have a robust grasp of employment law."