Voluntary sector income has become increasingly concentrated in the hands of a few large organisations, according to a new report from a Conservative think tank.
The Centre for Social Justice, which was founded by the work and pensions secretary, Iain Duncan Smith, also said a poll of its 350-strong small charities alliance found 20 per cent were at risk of closing.
The report, to be published this week, says that small charities get a smaller share of donations compared with seven years ago.
The report, Something's Got to Give: the state of Britain's voluntary sector, says that charities with annual incomes of £100,000 or less account for only 3.5 per cent of the total £38bn income of the voluntary sector, down from 5.4 per cent in 2006.
But charities with incomes of more than £5m a year, which make up 1.2 per cent of charities, get almost 69 per cent of voluntary sector income.
The report was produced by a working group chaired by Danny Kruger, chief executive of crime prevention charity Only Connect and a former speechwriter for the Prime Minister, David Cameron. It says regulations to protect the rights of public sector workers whose employment is transferred to charities were deterring small charities from taking government contracts.
These regulations include Tupe (Transfer of Undertakings (Protection of Employment)) and the Cosop (Cabinet Office Statement of Practice on Staff Transfers in the Public Sector), which give the transferred staff many of the same terms and pension rights.
Some charities told the Centre for Social Justice that they did not always want to take on transferred staff who "might not share their ethos and approach" and could not afford to take on the pension liabilities that came with them.
Charities are also losing out because local authorities were outsourcing services such as care for homeless or elderly people to private companies rather than voluntary organisations, the report found.
Christian Guy, director of the Centre for Social Justice, said: "The government should make changes so that small charities can be confident that they won’t be stuck with unaffordable deals or staff that will compromise their ethos when they bid to run public services. These obligations deter charities from replacing public bodies as the deliverers of services. This ultimately stifles innovation and cramps the labour market."
The Centre for Social Justice said 55 per cent of the councils that responded to their information request gave a smaller percentage of their contracts to the voluntary sector in 2011/12 than they gave in the previous year.
Researchers sent requests under the Freedom of Information Act to 152 councils but said only a minority of authorities kept the necessary records.
The report also found that key goals for creating the upsurge in voluntary action envisaged in David Cameron's big society had yet to be met.
Kruger said: "Sadly, the government has also begun to retreat from speaking about society itself as the locus of social change. Important steps have been taken, yet there is still further to go.
"Volunteering seems to have risen slightly and some government initiatives are attempting to build this further, but there has certainly not been a radical upsurge in community action. Power has indeed been devolved to local government; but not – as intended – from there to local communities."