Tories and Liberal Democrats objected to a provision in the Finance Bill that would have required employers to file payroll returns and information over the Internet by 2010 or pay an agent to do it for them. Failure to comply would incur a fixed penalty fine of up to £3,000.
Shadow chief secretary to the treasury John Bercow said that while professional bodies believed in an electronic solution in the long term, the timescale proposed was unrealistic and problems with current computer systems needed to be resolved first.
Liberal Democrat treasury spokesman John Burnett said, "I do not believe that it is in the interests of the Inland Revenue, let alone the taxpayers that e-filing should be mandatory; it should be permissive."
Paymaster general Dawn Primarolo said, "Electronic filing of PAYE for the overwhelming majority of people by 2010 is not an unrealistic target."
The Government won a vote on the issue by 18 votes to nine after Primarolo conceded the need to make provision in the regulations for those organisations such as the Bretheren which have a religious objections to using computers.