Small employers will not be penalised if they fail to file their P35 end of year returns for 2009/10 online.
Despite the fact the online filing for PAYE is now compulsory for most employers, HMRC now confirms that it will not penalise small employers (those with five or fewer employees) who file their end of year PAYE returns for this year in paper form.
This article has been updated, see HMRC clarifies P35s penalties

All P35 forms must reach HMRC by 19 May 2010, otherwise late filing penalties will apply.

For details of which penalties to apply to those who employ more than 5 employees see Penalties for failing to file PAYE online .

For late filing penalties see Tax penalties: failure to make a return (late filing). 

Penalties if there is an error on a PAYE return: penalties are charged according to a complex formula which depends entirely on the facts of each case, and weighing up the actual tax loss (if any) and taxpaper behaviour, see Tax compliance: errors in returns and documents.