MPs have strongly criticised both the Charity Commission and HMRC for failing to deal adequately with fraud and abuse of reliefs on charitable donations, which it says risk giving the charity sector a bad name.

In its report the Public Accounts Committee (PAC) described the Charity Commission as 'not fit for purpose' and said it 'too willingly accepts what charities tell it, without verifying or challenging the claims made, and it does not appropriately prioritise its limited resources to investigate the most serious cases of potential abuse of charitable status.'

In particular, the PAC labelled the Charity Commission's investigation in the controversial case of the Cup Trust as 'feeble', saying it was 'too slow and inefficient' in examining the charity, which had an income of £176m, made a gift aid claim of £46m but gave only £152,292 to good causes as part of a suspected abuse of the gift aid tax rules.

PAC chair Margaret Hodge said: 'We have little confidence in the Commission's ability to put right its problems and failings. When the Commission finds its new chief executive, they will have to bring about radical change in the Commission's culture and operations, to restore confidence in its ability to regulate charities.'

PAC also wants HMRC to do more to tackle what it calls 'flagrant abuse' of charity relief as part of tax avoidance schemes, which it says is currently 'an incredibly slow process'. In its report Gift Aid and other tax reliefs on charitable donation, the committee says HMRC estimates that £170m was lost in 2012-13 through avoidance, fraud and error resulting from the misuse of these reliefs.

The committee points out that since 2004 HMRC has identified, investigated and challenged eight marketed avoidance schemes, and it has concluded that these have misused reliefs on donations, but 1,800 cases (90% of the original subscribers to these schemes) with £217m of tax at risk remain open as the users are willing to test HMRC's assessment at tribunal.

HMRC is criticised for failing to collect sufficient data to determine whether or not Gift Aid is operating as intended As a result, the committee said the evidence for increased charitable giving 'is at best inconclusive'. In particular HMRC does not have enough information about the impact of changes to Corporate Gift Aid, with some evidence suggesting the change may have reduced the income charities receive from donations by businesses.

Hodge said: 'We were also surprised that the sharing of information both within HMRC and externally with such bodies as the Charity Commission has been poor.'

The PAC wants to see more 'joined up' exchange of information to tackle suspected instances of abuse of the charitable donation system, plus a simplification of the tax rules for making donations.