Charities will be hit hard by the Vat increase, a tax expert has warned.

Baker Tilly, which operates from Tunbridge Wells, says the rise in last month's (June) Emergency Budget - from 17.5 per cent to 20 per cent - will have a significant detrimental effect on the already hard-pressed charity sector.

Charities are unable to recover the Vat element of their costs because they are deemed to be carrying out "non-business" activities.

Baker Tilly cites claims by 16 large charities that the increase could cost them £5m a year. That figure shoots up when the 300,000 other UK charities are taken into account.

George Bull, Baker Tilly's head of tax, said: "Donations have already fallen across the sector during the recession and this extra VAT burden will not be welcomed at a time when demand for charity services is growing as people struggle in recession."

He urged charities to review all Vat reliefs to ensure they are claiming the maximum available to them. For example, charities may qualify to receive zero-rated construction services for new buildings.

Audio: Sian Beusch, associate Vat director for Baker Tilly on the Vat increase

Although HMRC has imposed a new requirement that the building must be intended to be used 95 per cent or more for a relevant charitable purpose (as opposed to the previous 90 per cent requirement), many charities may be able to turn this "negative" into a positive.

He added that although many charities are aware that they can receive advertising services zero-rated, some do not realise how far the relief extends. For example, pay-per-click sponsored links on search engines will qualify, as will job adverts placed by the charity.

He said charities should make the most of the six-month run-up to the rate change in January by bringing forward expenditure . But he warned that there are limits on how much can be paid for now because of anti-forestalling legislation.