In the windy courtyard of a new glass-fronted office development, several dozen protesters, many in wheelchairs, spent an afternoon last month shouting angry chants against the government's reform of disability benefits. "We can't work! We can't play! What do they want us to do? Die?"

The protest was held in front of the London headquarters of the low-profile but powerful French-owned company Atos, responsible for a new and controversial computerised test used to judge whether benefit claimants are genuinely sick or merely skiving.

A surprisingly large number of police officers were on hand, and swiftly erected barriers around the protesters. Inside, employees in suits huddled at the window, peering down at the commotion. Protesters waved banners in the shape of coffins, marked with the slogan "Atos doesn't give a toss". A man warned through his megaphone: "We are being kettled. Disabled people are being kettled."

Given the intensity of anger among disability charities towards the reforms, many more of these demonstrations are expected in next few months, and senior members of the government are known to be anxious about the reaction of these groups to the looming change.

The automated Atos assessment is the focus of particular fury and alarm. Over the next three years, one and a half million people will have to undergo this new test. A complex computer program will help a team of "disability analysts" to rule on who is sufficiently fit for work.

People who have had no contact with the benefits system are unlikely to have heard of the Work Capability Assessment (WCA). Anyone with disabilities or serious ill-health will probably already have a detailed knowledge of the test's workings and its many alleged disturbing idiosyncrasies.

Aside from the question of whether a computer-led assessment is the best way to analyse someone's fitness, charities are uneasy with this particular test, describing it as a blunt and unsophisticated tool.

Since its preliminary rollout in 2008, people with terminal cancer have been found fit to work, people with mental health problems have complained their condition is not taken seriously, people with complex illnesses report that the tick-box system is not able to cope with the nuances of their problems. A revised, even more stringent version introduced this month means that blind and deaf people will no longer automatically receive sickness benefit, and are unlikely to qualify for extra help finding work.

The test is central part to the reform of incapacity benefit, seen both by the government and disability campaigners as outdated and in need of major overhaul. From the end of this month, it will be launched nationwide and there is great nervousness about what will happen once people start being reassessed at a rate of 11,000 a week.

To be found too unwell or incapacitated to work, individuals need to clock up 15 points during the 45-minute one-to-one assessment. If, for example, you can't pick up a £1 coin with either hand you get 15 points. Cannot learn or understand how to complete a simple task, such as setting an alarm clock? Also 15 points. Strangers have difficulty understanding your speech? Take six points.

Because of the way the questionnaire has been set, it is much harder to be classified as unfit for work under the new test than previously and, as a result, the reform is expected to save the government £1bn over five years. In pilots of the test, 30% fewer people have been found unfit for work and 70% fewer people have been found eligible for the full-rate unconditional support benefit. Already people have been told they don't qualify for benefits in much greater numbers than anticipated in government projections.

The test did not identify the array of problems that make life complicated for Matthew Hutchings, 36, and awarded him just six points, not enough to qualify for the benefit. Smiling and shy, he sits quietly as his parents Ray, a retired accountant, and Diane, a teacher, explain that he has had lifelong speech and language problems, is probably autistic, and has always had difficulties with grasping simple tasks.

"People have problems understanding him, he has problems with his speech, with his understanding and with his confidence. But it is a hidden thing, until you know him well. He's very vulnerable," his mother says.

When he was called for his disability test, his father accompanied him. "The assessment was farcical for someone like Matthew – it was all: Can you sit down? Can you stand up? Can you pick something up? He can do all those things, but that's not what the problem is," Ray says. "They asked if he could cook. I explained he couldn't, but that he was able to heat something up in a microwave. In the report they said he could cook."

His father appealed immediately against the judgment and six months later the case went to appeal. The tribunal judge ruled that Matthew was not capable of work, and awarded him 15 points.

The Daily Mail describes the new system as a "tough new test to weed out the workshy"; much media coverage of the revised test portrays claimants who are found fit for work as "scroungers" who have been "trying it on to get sickness benefit". Disability charities argue that, on the contrary, the government has tweaked the parameters of the test so that many severely ill and disabled people simply no longer qualify.

At the end of each session, the computer program generates a 25-page report summarising the person's general state of health, and fitness for work. People with severe health problems who have been given zero points say that they have told their assessors what was wrong with them, and been met with a computer-says-no response.

A man who has been registered blind since 2000 due to a hereditary degenerative sight condition was surprised to read his report's conclusion that "the client's level of disability would be expected to improve with time and appropriate treatment". "I'm losing sight all the time. When I complained, I had a letter that told me 'the information contained in the report is medically reasonable and appropriately justified,'" he says (he asked not to be named, to avoid complications with further claims). "It's meaningless. I've had no apology."

This is a problem that has exploded on to the desks of advice centres, MPs and charities around the country since the test was introduced for all new claimants of the benefit in 2008.

Some claimants say the tests are rushed and impersonal, carried out by staff who barely make eye contact because they are too busy inputting data into the computer. A government-ordered review acknowledges that the assessment has a lack of "empathy", describing the whole process as "impersonal, mechanistic and lacking in clarity", and recommended a string of changes. The Department for Work and Pensions promises that most of these changes will have been implemented by the time the retesting gets fully under way later this year, but charities remain unconvinced.

For disabled people or people with serious illnesses the prospect of having their health reassessed is causing growing unease and anger. This anger is directed both against the Department for Work and Pensions, which is continuing the reform of Incapacity Benefit started by the last government, but also against Atos, which is being paid about £100m a year to carry out the tests.

Tracey Oakley: 'I want to work, but who's going to employ me in this state?' Photograph: Christopher Thomond for the Guardian

The benefits system is notoriously complex, but to understand the growing alarm of disabled people, you need to take in a few key points.

Since 2008, anyone claiming sickness or disability-related benefits for the first time has been required to take the Atos-administered Work Capability Assessment (WCA); from the end of this month, all existing incapacity benefit claimants will be reassessed using this test, as the old benefit is phased out and a new system, employment support allowance (ESA), is brought in.

If they are awarded 15 points, they will be moved on to ESA, which has two levels – the support group, where claimants are judged to be too disabled or unwell to be expected to work, and the work-related activity group, where claimants are deemed to be capable of working, provided they are supported into employment.

If they don't score 15 points, they will be moved on to the regular jobseekers' allowance. This is around £25 a week less than incapacity benefit, and will leave people with their income cut by just over a quarter. This lower benefit also lacks the immediate, intensive support for getting back to work that ESA is designed to provide.

The new benefit is based on the principle of looking at what people are able to do, rather than concentrating on what they cannot do – a principle that disability campaigners mostly support. The theoretical goal is to help people who have some level of sickness or disability find appropriate work, rather writing them off as unfit in perpetuity.

The problem lies partly in the peculiar outcomes of the Atos test. In Chesterfield, Matthew Hutchings's MP, Toby Perkins (Labour), says this issue has occupied much of his time since he won his seat last May. "The evidence from people that I am seeing is that people that are clearly not fit for work are being identified as fit for work. The consequence of that is that poor people are £25 a week worse off."

Large numbers of people who have been through this test have been so amazed at being found fit to work that they have formally appealed. Tribunal judges are overturning around 40% of cases they see and this high level of success at appeal is interpreted by charities as proof that the original test is flawed.

Some charities also argue that the government has failed to appreciate how few jobs are available for people with disabilities or health problems, and point out that if people with health problems are moved from incapacity benefit of around £91 a week to jobseeker's allowance at £65 a week, but stand little chance of actually finding work, the net result is simply to impoverish them.

Staff at the Derbyshire Unemployed Workers' Centres in Chesterfield are supporting 400 people who are waiting to go to tribunal to contest their test findings. They have already helped Tracey Oakley, 40, a mother of three who used to work in a hospital kitchen. Sitting at her kitchen table, on two cushions, a walking stick to hand, she explains that she has been off work with severe back problems since 2008. Back problems are often cited as a sick-note culture phenomenon, an easy excuse for staying away from work, but it is very clear that Oakley is suffering.

She has had one operation on her back and is waiting for a second; in the meantime she is on high daily doses of morphine, diazepam and codeine. She is barely able to walk to the shops; her teenage children now do all the cooking because it is too painful for her to stand to prepare food.

Her doctor does not think she is fit to work, but she scored zero points in her assessment. "She bent me every way my body wasn't supposed to go. I was in tears by the end of it." Later a tribunal judge took only a few minutes to overturn the original decision. She has recently been through a second WCA, and is awaiting the outcome.

"When you get nought points, it makes you feel like you're lying," she says. "I've always worked, since I was 15. I want to work again but who's going to employ me in this state? It's very stressful."

The centres also supported a former mine worker who had heart disease following a heart attack, and had been told by his doctor to stop work, aged 59. He was awarded six points in his test, appealed against the finding, and was given enough extra points to qualify for the benefit. Five months later, he was called back for a new assessment, and complained of the frustration of having to go through the whole process again. He died of heart failure a day before the test appointment.

His family believe that the stress contributed to his death, according to Colin Hampton, co-ordinator of thecentres. "The government gives the impression that if everyone got up off their sick bed there would be jobs for them, but that is a load of bollocks, as everyone knows," he says. "This policy does not address the fact that there are no employers ready to take on people who have health-limiting problems. How many employers do you know who are willing to employ someone with a history of mental health problems?"

Paul Hadfield: 'They don't mark down that every step is painful.' Photograph: Christopher Thomond for the Guardian

Nearby, Paul Hadfield, 56, is appealing the decision of his WCA a second time, less than a year after his first appeal was successful. A former forklift truck driver, he became ill with kidney cancer in 2007 and had a kidney removed. "Until then, I'd never had a day off in my life," he says. After the operation he was diagnosed diabetic, developed heart disease and is still recovering. He has become so weak, his wife says, that he often has to climb upstairs on his hands and feet.

He was given only nine points in his first WCA, but he went to tribunal, where the judge found him eligible for the higher level of benefit. Shortly after the tribunal he was called for another assessment, and this time was awarded zero points. He is waiting to appeal a second time.

"The questions are so basic – 'Can you walk?' 'Can you sit?' 'Can you stand?' They don't mark down that every step you take is painful."

Hadfield is furious at the wasted time and money involved in appealing twice against a ruling. "It must be costing the taxpayer an absolute fortune for people to sit there and listen to these cases," he says.

The charity is also helping Tony Elliott, 60, a former diamond driller for the construction industry, who has severe back problems as a result of his work. He sits on the edge of the sofa, his back rod-straight, tense, and in evident pain. His consultant at the pain unit he attends has diagnosed him with significant degenerative spinal disease and told him he is not fit to work.

"The [WCA] medical was an absolute joke. The person doing the assessment had a computer in front of him with the questions on it. He never bothered to look at me when he was asking the questions, not one time. He was just going through on his computer with his mouse, knocking off the questions. I was thinking, 'I'm a human being, me'," he says.

"I was given zero points." He pours out the contents of a large yellow plastic box with morphine tablets, lyrica and other painkillers, setting out his daily dosage. He went to tribunal, where judges overturned the decision.

As he outlined his welfare reform proposals last week, David Cameron said a "collective culture of responsibility" had been lost, which meant that people were going "off sick when they could work". "We simply have to get to grips with the sicknote culture," he said. But these Chesterfield residents do not fit the mould of irresponsible people, trying to fiddle the system.

Former coal-mining areas such as Chesterfield are often highlighted as regions that illustrate the need for reform. This kind of area is said to have seen a sharp rise in claimants as the coal mines closed, as the Conservative government in the 1980s pushed people on to the benefit, to massage unemployment figures. This is an academic argument in an area where unemployment remains high.

At the protest outside Atos's headquarters last month, one young man, nervous and clearly not accustomed to addressing rallies, took the microphone to explain how his uncle, who had severe mental health problems, committed suicide after the test gave him zero points and found him fit to work.

Dismayed to find his benefit claim rejected, he had appealed against the decision, and won at tribunal. But shortly after that decision, he was called in for another assessment, and for a second time scored zero points and was told he did not qualify for the benefit. He began appealing against the decision again, but a few days before another tribunal date was set, he hanged himself.

His family did not want his name in the paper, but sent through a copy of the serious incident review carried out by the local jobcentre, which concluded: "We need to review the WCA and appeal process to take the needs of our vulnerable customers into account."

His sister acknowledges that it is hard to know precisely why someone kills themselves, but said she was clear, after reading all his correspondence, that he was finding the prolonged assessment and reassessment process profoundly stressful. The DWP would not comment on an individual case, but said that improvements to how the test handles people with mental health problems are under way.

This is an extreme example of a frequent problem. "Failing the WCA can have a detrimental effect on an individual's mental health, which is further compounded by the pressure of challenging unfavourable decisions at tribunal," the Scottish Association for Mental Health says.

The government knows that the new test has many problems, not least because a detailed independent report set out the numerous shortcomings of the system last November. Its author, Professor Malcolm Harrington, concluded that much needed to be done to make the assessment "fairer and more effective".

He warned that some conditions were "more difficult to assess than others. This appears to be the case with more subjective conditions such as mental health or other fluctuating conditions."

Harrington, like many disability charities, supports the underlying idea that work is good for the health, and his report quotes Voltaire's Candide: "Work saves us from three great evils: boredom, vice and need." "All the evidence shows that the longer an individual is off sick, the less likely it is that they will return to work," he writes.

But he warned that the test needed to be radically improved, and called for advice from charities working in areas where the assessment is weakest – the National Autistic Society, Mind and Mencap – to propose improvements. Their recommendations will go to the government in April, but they expect it will be too late to get that aspect of the test changed in time for the national launch.

A key recommendation concerns the amount of weight given to the test's conclusions. An Atos official says the computer program: "serves as a guide only and the healthcare professionals are required to use their own clinical judgment to justify the medical opinion contained in the medical report." Harrington has reminded jobcentre officials that they shouldn't just rubberstamp the computer report, but make a rounded judgment using medical records. The government has agreed.

Jane Alltimes, senior policy officer at Mencap, says recent revisions to the test were making it tougher still. "We believe that more people will fail and not be eligible," she says. "But 65% of people with learning disabilities say they want to work. There are lots of reasons why people with learning disabilities don't get jobs – there are issues of employer prejudice, of lack of support. It's not for want of trying."

A Guardian reader, who was recovering from breast cancer, and has had long-term mental health issues, last year let me sit in on an earlier version of Atos's health assessment. Although the point-scoring system is different, the new test is similar in structure.

The assessor refused to allow the session to be recorded or for notes to be taken, but in summary the test consisted of him swiftly running through a set of questions: "How did you get here, by train, by bus? How do you spend your day? Do you watch TV? Do you listen to the radio? Do you go to the pub? Do you drink alcohol? Do you have pets? Do you have a social life? What time do you get up? Do you do housework? Do you follow the news? What floor do you live on? Do you have thoughts of suicide or self-harm? Are you able to cook? Can you go to the shops? Can you get yourself dressed?"

Alongside these questions the applicant gave, in passing, details of the childhood sexual abuse that had triggered her depression. The questions were followed by a short physical test, lasting about four minutes, in which she was asked to lift her arms above her head and behind her back and to lie down and lift her legs.

"It's not meant to be stressful, but inevitably it is stressful," she said afterwards. "I found the whole thing really humiliating. There was nothing there that they didn't already have, from my doctor, my social worker, my consultant."

One aspect of the test people particularly dislike is the way assessors (60% of whom are nurses and 40% doctors) extract information sideways from claimants. "People are asked: 'Do you watch EastEnders or Coronation Street?' If they say yes, then that's interpreted as meaning they can sit in a chair for 30 minutes, and that they can concentrate for 30 minutes, and that goes towards building up their profile," Rebecca Rennison, a policy expert with Leonard Cheshire Disability, says.

Assessors observe the claimants' demeanour during the test. One report, explaining why a woman with mental health problems had been found ineligible for the benefit, states as justification that she "did not appear to be trembling . . . sweating . . . or make rocking movements". The DWP manual states "rocking may indicate anxiety".

Harrington declined an interview, but has made his unease about the imminent rollout clear, and told the BBC recently: "The timing is far from perfect . . . I think the department and Atos will have quite a job on their hands."

Chris Grayling, the employment minister, says all the improvements recommended by Harrington will be in place and improvements will be added gradually. He is at pains to stress that the process is not primarily motivated by a desire to save money.

"There is no letter from the Treasury saying your mission is to save £1bn. As a department we have no financial objectives for this process. This is not about saying: Can we squeeze a few more people into the fit-for-work group?"

Stephen Timms, shadow employment secretary, agrees with the principle of reform (which was, after all, launched by his government), but is anxious about the speed with which it is being implemented. Professor Paul Gregg, an economist and welfare reform expert who was one of the architects of the ESA system, says he thought it was a mistake to continue until changes had been tested.

"The test is badly malfunctioning. The current assessment is a complete mess. We now need to trial the new proposed reformed system to prove that it works and that it avoids the serious stress and misclassification of people that we have already seen, before we start implementing it on a large and vulnerable population. This is not something to rush. You have to get it right."