In a case brought against the German government by the European Commission at the end of last month, the court ruled that commissioned research should not be exempt from VAT.
If the ruling is adopted in the UK, it will mean that the cost of university research for charities will rise by 17.5 per cent.
"This is potentially very bad news for charities which fund research undertaken by universities, as there is now the threat of an irrecoverable VAT charge being imposed on top of the cost of research services,
said Russell Moore, VAT partner with accountants Saffery Champness. "Every ?xA3;1 million spent on research now may only be worth ?xA3;850,000 in future."
Customs & Excise has already begun meetings with interested parties including charities on the issue, indicating that a change in UK VAT law, in line with the European Court judgment, is likely.
"Customs has advised that no change will be made until they have fully consulted with affected bodies, but the writing appears to be on the wall,
said Moore. "We anticipate a change but it won't happen for at least a year."
The Institute of Cancer Research called on the Government to take action to ensure that the voluntary sector does not incur another financial burden.
Finance director Andrew Whitehead said: "This is extremely worrying. If we were to lose the zero-rating of laboratory supplies and research equipment, our budgets for these areas, which are already stretched, would be reduced by a fifth. We hope the Government recognises that this could be extremely damaging for institutions which are involved in vital research and takes action to prevent this occurring."
But Heather Cantley, of the European Charities' Committee on VAT, said that the UK's adoption of the ruling was far from settled. "There hasn't been time to absorb the ramifications of the decision. But it's possible that VAT liabilities of NGOs could be affected," she said.