Customs and Excise will merge with the Inland Revenue, Chancellor Gordon Brown has announced.
Evasion of duty is a major problem
The move, revealed as part of Wednesday's Budget, will create a single tax collection agency and save money on administration.
The move will mean 10,500 jobs will be lost from the combined body and a further 3,500 will be redeployed.
Customs and Excise has been under its current name since 1909, although much of its structure dates back 300 years.
It was announced last month that the investigative arm of Customs and Excise would become part of the government's new Serious Organised Crime Agency.
There have also been calls for the creation of a frontier police with the immigration function of Customs and Excise to be merged with the Immigration Service and the relevant police sections.
As well as playing a leading role in the fight against drugs entering the UK, Customs has had to adapt to new challenges such as human trafficking and the smuggling of cigarettes.
The latter is estimated to have cost the Treasury many hundreds of millions in lost revenue.
The Inland Revenue's main duty remains the collection of income tax, first announced in 1798 to fund Britain's involvement in the Napoleonic wars.
Newspapers have suggested the Treasury is dissatisfied with the Inland Revenue's cautious approach to gathering taxes, with revenues failing to meet expectations.
They have also speculated that the new merged body, which could be housed in an unoccupied part of the Treasury's offices in Whitehall, might have to overcome a major clash of cultures between the two organisations.