The merger of the Inland Revenue and Customs & Excise has involved "possibly the biggest amount of change that we have seen across the public sector", David Varney, chairman of the tax authority, told the Financial Times. Mr Varney emphasised the scale of the task involved in completing the HMRC merger.

But he brushed off concerns about the merger's benefits and slow rate of progress, which have been voiced by some people both inside and outside the organisation. "I think it's gone pretty well so far," he said.

The most visible move towards improving the service to taxpayers so far has been the creation of a single "large business service".

Its goal is to make it easier for businesses to interact with tax inspectors. Mr Varney also thinks that companies will benefit from greater continuity from the single service.

Although some companies doubt it will offer a significant advantage for large businesses that usually employ separate teams of specialists for direct and indirect tax, Mr Varney remains optimistic that the benefits will soon flow.

Even though the government's vision of a unified tax service has won widespread support from business, there is less confidence in its ability to cut costs without jeopardising service or the collection of tax revenues.

At the start of the year, the Conservative party described the merger plan as shambolic because of the government's lack of detailed planning.

Mr Varney dismissed this concern as unfounded. "The idea you can plan this like a railway timetable for a big and complex organisation...is not the way most big corporates work when they face big changes."

Mr Varney was also sanguine about the slow pace of the merger. He points out that HMRC was unable to spend money on the merger before parliament formally approved it in April.

The fact that stationery still bore the logos of the old departments, taxpayers were being told to make contact through the same channels as before, and Customs still had a separate bank account reflected sensible decisions on costs and service changes, he said.

In general, the slow pace of the merger is a measure of the scale and complexity of the problems with which the management is grappling. The 100,000-strong organisation, which represents a fifth of the civil service, is required to make £507m savings by 2007-08. This is largely as a result of a cut of 12,500 jobs.

Some of these job cuts could come from the network of regional offices, which Mr Varney said "requires detailed assessment". But the Public and Commercial Services union has voiced strong opposition to closures, which it said threatened jobs and public services "for some of the most vulnerable members of society". It had not ruled out industrial action, it said.

The union and some business groups are also sceptical about the efficiency gains planned from greater e-business. The transition to an electronic tax service could put relations with taxpayers under strain.

There are already reports of serious teething problems with some systems. Earlier this year, the Law Society complained that computer problems were creating difficulties for solicitors trying to file stamp duty land tax returns.

Another IT headache for HMRC is the existence of the two separate providers: the Inland Revenue had a contract with Cap Gemini, while Customs had a contract with Fujitsu.

Bringing the contracts together into a more coherent arrangement has been one of HMRC's goals, but progress has been limited.

Mr Varney said he was waiting to see if the two companies had the "commercial imagination" to come up with an answer. Failure to reach agreement would be "a bit of a problem but not fatal".

"I refuse to believe that having two service providers rather than one is a major stumbling block. We'll have to work round it."

Achieving efficiency gains through the use of IT is likely to dominate the management's agenda over the next few years.

But it must also secure the merger's goals of reducing costs for business and improving compliance. If anything goes wrong, it could put large amounts of tax revenues at risk while imposing extra burdens on taxpayers.

Mr Varney has unveiled the new management structure affecting 80,000 tax officials, in an attempt to bind together the disparate activities of the newly-merged tax authority.

He was optimistic that the new structure would create "more managerial focus" in the organisation.

Mr Varney believes that the right building blocks are already in place. "We've now got a lot more people into positions where together we will start to work on what we want to deliver."