The Home Office should consider scrapping controversial immigration fees charged to children from families who can’t afford it and refund profits made from failed citizenship applications, according to an official watchdog.

The call came as it emerged on Thursday that the Home Office is making a profit of £2m a month from charging children for citizenship, with about 40,000 estimated to be affected in the past year.

A report by the independent chief inspector of borders and immigration said the government should publish information on the negative social and equality impact of the Home Office’s fees policy, which is blamed for driving thousands of parents into overwork, debt and even skipping meals to save for the costs.

While welcoming David Bolt’s call for a full review of the process governing the waivers applied to some applications and for greater transparency around the decision-making process, charities pressed for an end to Home Office profiteering off immigration and citizenship applications.

The child citizenship charges were described as the Home Office’s new Windrush scandal in a letter to the Guardian signed by a range of charities including Coram, the Runnymede Trust, a number of headteachers and the community organising group Citizens UK.

The Home Office made £22m in 10 months by charging children who meet the strict eligibility citizenship criteria for processing documents, it was revealed by freedom of information requests from Citizens UK.

The cost of a citizenship application for a child is £1,012, while the cost of processing is just £372, meaning the Home Office makes an estimated £640 profit from each child application it receives.

Most of Bolt’s recommendations concerned the need to explain the calculations behind dramatic increases in Home Office fees, while other proposals focused on the effects on vulnerable individuals, including children.

The Home Office rejected two of Bolt’s recommendations. In response Bolt said he couldn’t understand why it was unable to launch a public consultation on charging for borders, immigration and citizenship system services in time to inform this year’s government spending review.

But Bolt said he was more concerned about the Home Office’s rejection of his call for a breakdown of how it calculated the part of the fee relating to how a successful applicant would benefit economically from British citizenship.

He added: “I am disappointed that the Home Office does not recognise this is a question of basic fairness, which should not have to wait on discussions with the Treasury about the department’s future funding.”

Fees for immigration and nationality applications have steadily risen since 2010 under the “hostile environment” policy, including in a round of changes last April. Cases have included a family who had to choose between paying for accommodation or saving money for Home Office fees. Another family, who have a disabled daughter, were last year still paying back the £7,000 they borrowed to pay the charges and said they feared losing their home.

Bolt’s call for a full review of how the process applies fee waivers for some poorer children, was “partially accepted” by the Home Office, which said it was in discussions about the issue.

A spokesperson said: “To reduce the burden on UK taxpayers, fee levels take into account the wider costs involved in running our border, immigration and citizenship system, so that those who directly benefit from it contribute to its funding. The home secretary has committed to keeping fees under review.

“However, we recognise that we have a duty to support the vulnerable. That is why we have fee waivers in place for those who need it most, including children and young people who have spent a significant amount of their life in the UK.”

The Home Office said it expected the 2019 spending review to influence its approach on fees, but added that it would “prioritise a system which is fair and reduces the burden on UK taxpayers”.

Minnie Rahman, public affairs and campaigns manager at the Joint Council for the Welfare of Immigrants, said urgent action was needed to ensure people were not denied basic rights just because they can’t afford exorbitant fees.

“We see clients every day who are pushed into destitution while the Home Office makes up to 2000% profits on some applications,” she added.

“The impact on children who are unable to apply for citizenship because of the fees is particularly disturbing. The Home Office should not be profiteering off immigration and citizenship applications.”