The revelation will fuel the long-standing campaign to exempt charities from VAT.
Russell Moore, VAT partner with specialist charity accountants Saffery Champness, believes the sector vastly underestimates what it pays the Government. He said: "It's our belief that irrecoverable VAT is fast approaching £1 billion and increasing all the time."
Geoff Miller, chairman of the Charity Finance Directors Group, backs the new estimate. "The principles behind the calculation are quite rational, he said. "If charities are paying as much as £1 billion in VAT, the Government should listen."
The finance directors' group also warns that if rumours that chancellor Gordon Brown will increase VAT to 20 per cent in next month's Budget prove correct, the sector's VAT bill could jump by another £100 million.
Since 1999, the figure of £400 million has been accepted as a reliable estimate of the sector's VAT bill and was used by the NCVO to justify a call for a VAT rebate in its submission to the Treasury's review of the voluntary sector's role in public services.
But according to Moore, that estimate is not only out of date but also flawed. He claims that the total fails to include the millions of pounds the sector loses each year on spending on areas such as education, research, and one-off fundraising activities.
Income from activities in these areas is exempt from VAT but spending is not.
"A charity undertaking, for example, research would not be able to recover VAT on equipment or buildings, said Moore. "And the VAT lost on expenditure on fundraising events is huge."
Moore also claims Customs and Excise is taking a far more restrictive attitude towards VAT exemptions for charities. "It is abandoning the spirit of the reliefs and causing charities a lot of problems, he said.
The Government has set its face against the complete abolition of the sector's irrecoverable VAT. But Paul Boateng, financial secretary to the Treasury, suggested at a conference in January that the Government was considering targeted relief for charities that carried out public services.