Charities face an £18m annual increase in the cost of sending direct mail when bulk mail becomes subject to VAT this year, the Direct Marketing Association has warned.
Bulk mail, used by many charities when sending direct mail for fundraising purposes, is currently exempt from VAT charges.
But last year bulk mail was removed from the universal service list – Royal Mail guarantees that services on this list will deliver letter or parcels to any address in the UK for the same price.
This means bulk mail will lose its VAT exemption from 2 April and anyone using it after this date will be charged an extra 20 per cent.
Separately, the communications regulator Ofcom has proposed giving the Royal Mail the freedom to set its own prices for bulk mail.
A spokesman for the DMA said that, according to figures from media research company Nielsen, charities spent £256m on direct mail in 2010.
He said that because postage typically represented 35 per cent of the cost of a direct mail campaign, charities spent £89.6m on postage.
Once VAT was charged on this amount, he said, charities would be charged an extra £17.9m when sending out direct mail.
Mike Lordon, chief of operations at the DMA, called for clarity on pricing.
"The prospect of VAT charges on fundraising mail is a serious financial issue for charities, but the industry is being left in the dark by HM Revenue & Customs and the Royal Mail, which have yet to clarify the details about the changes," he said.
"We need to know if the possibility of adding VAT is based on current guidelines or some as yet unannounced plans, and if VAT will be collected from 2 April or if there will be a grace period. Charities obviously need time to factor this extra cost into their budgets.
"These additional costs could well prove to be the final straw for many charities that will abandon the medium in favour of more competitively priced marketing channels."
A spokesman for the Royal Mail said that any person or organisation using bulk mail would be charged VAT from 2 April.
"Updated information about new VAT charges is already on our website," he said. "We will be writing to customers shortly to notify them of the changes."
A spokeswoman for Ofcom said the plans for VAT to be charged on bulk mail had been finalised before Ofcom became the regulator for postal services last October.
She said it had run a consultation on whether to allow the Royal Mail to set its own prices for bulk mail. She said this had now closed and a decision would be announced in the spring.