The Chancellor's removal of tax relief on gifts from dividends last December caused a headache for charities, said financial advisers Grant Thornton, which commissioned the survey of around 170 large charities. The number of charities expressing concern about the tax regime has doubled since the changes.
More positively, sales and donations have increased in line with the improved economy. Trading income grew as a share of total sector income from 16.5 per cent in 2002 to 20.4 per cent in 2004, according to the survey.
Sales are the third source of income after government (39.5 per cent) and donations. Donations rose as a proportion of funding to 24.2 per cent, up from 21.4 per cent two years ago. Endowments were also up, to 9.6 per cent of income, from 8.1 per cent in 2002.
Michael Rogerson, head of Grant Thornton's charity group, said the removal of admission Gift Aid had hit museums and heritage sites, while complex VAT regulations had not been helpful either.
Rogerson urged the Government to simplify VAT red tape to make it easier for charities to maximise their income. He added: "We led a group of charities to see the Chancellor to urge that he keep the tax relief on dividends, but we were unable to move him."
A number of museums and public heritage charities took advantage of the admission Gift Aid scheme for donations before it was phased out in April.
Sustainability of funding was a key concern for more than half of the charities surveyed. "Successive governments have hived off huge amounts of public sector activities, such as drug rehabilitation, counselling and medical research, and left the charity sector to fill the need," said Rogerson.