Alex Hawkes

A breakdown in basic services provided by HM Revenue & Customs, including unanswered phone calls and unopened letters, risks undermining respect for the tax system, MPs on the Treasury select committee warn today.

Large-scale job cuts, a senior management out of touch with day-to-day issues and severe delays responding to queries left the future looking "bleak". An increasing focus on online is putting its services beyond the reach of some people.

The committee paints a picture of a department barely able to function, mainly as a result of cost savings and re-organisations imposed by the coalition and the last Labour government. HM Revenue & Customs has had to deal with real-terms cuts to its budget every year since its formation.

In recent weeks HMRC failed to issue thousands of income tax demands to meet the 31 July self assessment deadline. Lord Oakeshott, the former Liberal Democrat Treasury spokesman said: "Britain is fighting its financial deficit with one hand tied behind its back because HMRC is in such chaos. When businesses lose control of their cash collection they go bust, but HMRC just seems to blunder on."

The report highlights problems with the PAYE system as an example of cuts being introduced before efficiency savings were secured.

In June 2009 the department introduced a new computer system but when it came in, a year late, it emerged that 6 million people had either overpaid or underpaid tax, resulting in unexpected bills.

The MPs say the ensuing row damaged the public perception of HMRC. "There have been credible suggestions that HMRC has made savings by reducing staff before the enabling efficiencies have been fully realised – with resulting impacts on performance and costs," the MPs say.

The report quotes a former HMRC employee, Martin Lewis, who alleged that senior management are out of touch.

"Middle managers are discouraged from reporting "bad news" or news that projects were becoming unmanageable or going awry, he told MPs.

"Senior managers are largely unaware of the difficulties, problems, and obstacles that the bulk of the organisation faces. They know little of the scale of unanswered phone calls, and the unopened letters, the data quality of tax payers' records and perhaps most importantly the nature and quality of the service provided on a daily basis to the taxpaying public."

The committee said HMRC's record on returning telephone calls was "patchy at best and unacceptable at worst". Long delays in answering post were endemic, the MPs add. "Such delays increase demand elsewhere , as taxpayers and tax credit claimants chase progress, increasing costs for the public and HMRC alike."

The prospects of HMRC's service to taxpayers improving are "bleak", the MPs say. "HMRC's written evidence suggests the department accepts and understands many of the issues. But the chairman Mike Clasper admitted that, in relation to customer service, 'we are not going to be in a great place until 2013.'"

An HMRC spokesman said: "We know we have a lot more to do to improve our services to customers. But HMRC is in a much stronger position now than in 2010 and plans to go further.

"We have recruited 1,000 contact centre advisers to manage exceptionally busy periods this year. We have improved the way we deal with post, for example rapidly reducing turnaround times on PAYE and Self Assessment post.

"Moving services online has been a success, making it easier and quicker for most customers to access HMRC services. We recognise that not everybody can access these online services but we are committed to delivering the same quality of service to all customers.