Charities that provide public services should be given VAT refunds, a report published by the European Commission has recommended.
The study by the consultancy Copenhagen Economics said the introduction of a VAT compensation scheme for non-profit organisations in Denmark had "led to a remarkable increase in the scale of activities of the non-profit organisations.
"This indicates that it may cause significant distortions to competition if only public bodies within tax-exempt sectors can recover input VAT."
Unlike charities delivering public services, public sector bodies are spared having to pay VAT.
Peter Jenkins, tax adviser at the Charity Tax Group, which campaigns for the voluntary sector on tax, said he expected the report would "inform the commission’s thinking" on the issue, though getting all member states to agree to an extension to the VAT refund scheme would be another matter.
"The report calls for an extension of the refund scheme and says it should not distinguish between taxpayer-funded bodies and charities," he said.
Jenkins said an extension of the refund scheme to charities would be "crucial to what the government is trying to do" in terms of getting more voluntary organisations to run public services.
Charity umbrella bodies stepped up their lobbying of the government in January to try to persuade it to refund VAT paid by charities that provide public services.
Both Acevo and the Charity Tax Group said they had increased the pressure on the government to put charities on a level playing field with public sector bodies that provide services, which are spared VAT.