Large employers must start filing electronically from May 2004 and must post end of year returns online the following year. Medium-sized firms must begin online filing by May 2006. No such deadline has been imposed on small businesses as it would be unfair on those who do not yet have easy access to the Internet.

However, the Inland Revenue wants small businesses to start handling their finances online as soon as possible and is offering a tax-free incentive to begin with the 2004-05 end of year returns and will run for five years.

The Revenue is writing to 1.6 million employers to inform them of their obligations under the changes. It says that online filing is secure, quick and cuts out paperwork.

A guide to paying electronically is available from the IR website at www.inlandrevenue.gov.uk

Small firms are defined as having fewer than 50 workers, while medium-sized companies employ no more than 249 staff.