HM Revenue & Customs (HMRC) should widen the provision of online tax services to save money and reduce the levels of errors in tax returns, according to a National Audit Office (NAO) report.

The department has already encouraged online filing of Income Tax Self Assessment returns, which saved an estimated £5m in processing costs in 2007-08.

But more could still be done, says the NAO report.

"The department should widen the provision of online services by emailing rather than posting PAYE tax coding notices to those who have filed their Income Tax Self Assessment returns online," it says.

The department should also seek to reinstate the online service for Tax Credit claimants once it has successfully piloted a new secure service and gained the necessary funding, says the NAO.

Problems with the original tax credits IT system run by EDS when it was launched in 2003 affected 455,000 households and led to overpayments of £1.9bn.

Earlier this year a long-running dispute between HMRC and EDS over the system ended with the US supplier agreeing to pay the government £26.5m.

The NAO report also says HMRC should explore the benefits and costs of contracting out more high-volume, less-sensitive, automated data capture work.