Employers face fines of up to £3,000 if they refuse to file their tax returns using the internet, under proposals in the finance bill.

The Treasury yesterday confirmed the new rules will force employers to send electronic Paye returns by 2010 or be fined on a sliding scale up to £3,000. It estimates the Inland Revenue will save £35m in the first five years of the scheme.

The rules were put forward in the Budget when the government said small and medium-sized firms must make the system of employee tax collection more efficient, joining large corporations, which will be forced to comply with a tighter deadline.

But the move will catch out elderly and disabled people, who employ carers and families with full-time nannies, if they opt to pay their staff through a payroll system. Other small businesses which have yet to join the electronic age will also be forced to invest in the hardware and software over the next eight years to comply with the rules.

John Whiting, president of the Insititute of Taxation, said it was wrong to make the system compulsory. "You can't really criticise ministers for pushing ahead with e-filing. But it shouldn't be mandatory for everyone. The government should be making the system so attractive we all want to file tax returns electronically and not fining them when they don't."

A spokeswoman for the Treasury defended the move, saying the scheme had been adopted following recommendations in the independent Carter report. She said small employers would qualify for a £250 award if they made the transition before 2005. The award then declines on a sliding scale until 2010.

Employers could also file returns from libraries or internet cafes, avoiding the need for expensive investments in IT.