Launching its Parliamentary campaign on VAT at the House of Commons, the Charities' Tax Reform Group (CTRG) highlighted new research that found irrecoverable VAT consumes more than 4 per cent of the sector's annual expenditure.
"This isn't about a technical tax issue but about beneficiaries and people who are suffering - those with cancer or vulnerable children," said Nick Kavanagh, chairman of the CTRG.
He said the campaign wanted the Government to give immediate priority to four areas: social welfare charities providing public services; charities engaged in shared services; VAT on investment in fundraising; and the repair, construction and maintenance of charitable buildings.
Ministers could compensate charities for irrecoverable VAT by introducing a grant rebate system, a move that has been endorsed by Laszlo Kovacs, the EU Tax Commissioner.
Kavanagh also disputed Government claims about the cost of reforming VAT for the sector. "The Government has repeatedly told us that charities reach the parts of society it can't," he said. "Charities are more cost-effective - robbing them of VAT makes no sense."
Conservative MP Tim Yeo, founding director of CTRG in 1982, said: "CTRG has assembled an extremely powerful case. The Mori poll (which showed that 8 out of 10 people thought the Government should fully compensate charities for irrecoverable VAT) shows near-universal support for the solution it has proposed. The case is overwhelming. This has plagued the sector for a quarter of a century."
CTRG said it wants charities to lobby local MPs about the issue and include the irrecoverable VAT they pay in their GuideStar entries.
Labour peer Lord Howarth urged charities to take advantage of humanitarian crises to push the case for reform.