The Carter Review, by millionaire businessman Patrick Carter, came to the conclusion that companies with less than 50 employees should be given a £250 incentive next year and smaller amounts each year for the next four years if they submit their end-of-year details to the Inland Revenue electronically.

The report stated: 'We have no doubt that the way forward is for employers to take advantage of the opportunities provided by IT. Large employers should be doing this as a matter of course and it should be made mandatory for them to transact with the Inland Revenue electronically.'

'Once this strategy is delivered it will bring benefits not only to employers but also to the Inland Revenue. The Inland Revenue should use it as a platform on which to build a new business direction for the future.'

It is estimated that the five-year scheme will cost the government around £290 million and result in a saving of £105 million. After which time (2007) it will be compulsory for small businesses to file their details online. Companies with in excess of 50 employees will be obliged to file online from the earlier date of 2004.

Chancellor Gordon Brown praised the review, saying: 'There is a strong case for cash help for small firms to bring their payroll and tax systems online.'

Further recommendations in the report included: intermediaries to receive the incentive payment for each client for which they act; the Inland Revenue to withdraw its £1,000 charge for accrediting accounting software; the Inland Revenue Web site to be simplified to encourage more online return submissions; the Inland Revenue's service to be developed and improved; and the launch of an advertising campaign to make the public more aware of IT solutions.