The third sector's irrecoverable VAT bill could top £1bn a year if VAT is put up to 20 per cent after the election, figures from the Charity Tax Group suggest.
The preliminary findings of a continuing survey show that 41 charities that have a total income of almost £2bn lose an average of about 2.8 per cent of their income each year in irrecoverable VAT.
The figures suggest that the sector as a whole could be losing about £900m in VAT each year, and that this could increase by another £130m if the VAT rate rises to 20 per cent, as many commentators have predicted.
The findings also show that VAT is a more significant burden on organisations with annual incomes of less than £30m. These are paying out a larger proportion of their income in VAT than those above that threshold, the findings suggest.
The figures also indicate that the average percentage of unrestricted income lost to VAT is double that of total income lost in this way.
"These findings are still preliminary, but early trends are certainly revealing," said Helen Donoghue, director of the Charity Tax Group. "In particular, it's interesting that a disproportionate VAT burden seems to fall on smaller charities."
She said the group would need to collect data from a much larger sample group of charities before it could present firm figures to the Government.
"At the moment, we've spoken to only 41 charities," she said. "Although they represent a significant proportion of the sector's income, we need more organisations to come forward."
To contribute to the survey, charities should visit www.ctrg.org.uk/consultations.
£900m: The amount the sector could be losing a year in irrecoverable VAT
£1.03bn: The amount it could lose if the VAT rate rises to 20 per cent.