Around a tenth of the estimated £15m cost of building a residential school for children with learning disabilities in North London will be lost in tax, the charity fears.
It is continuing negotiations with government departments but is not hopeful of any concessions.
As things stand, the VAT cost of the project will have to be met by public donations.
Norwood's director of corporate services Duncan Milroy said: "It is difficult to escape the idea that 10 per cent of charity donations are going to the Government rather than to the project that donors want to support."
The new school will replace the existing Annie Lawson school at Ravenswood village in Berkshire. The school will take up to 60 students between the ages of 11-19, both day pupils, as well as residential students. Building is set to start next summer.
The school could have been funded by government had Norwood been either a faith-based or a special needs organisation. "Unfortunately we are both special needs and faith-based so we fall between two stools," explained Milroy.
Because students at the school will be funded by local authorities, its revenue will be exempt from VAT. As a consequence, VAT incurred on the construction of the educational facilities of the school will be irrecoverable.
"Ten per cent of the capital cost will be irrecoverable because it is partly an educational establishment, although the residential part will be zero-rated," said Milroy.
"We are yet to talk to Customs & Excise but all the advice we are getting points in this direction."
Norwood is also talking to government departments about getting some relief on the potential £1.5m VAT bill. But Milroy commented: "The Government talks about partnership, but despite this there is still a certain inflexibility."