Charitable status, and the automatic tax concessions that go with it, would disappear, leaving organisations such as medical research groups and independent schools without tax relief. Campaigning groups would lose government grants and be unregulated, making the Charity Commission redundant.
Only service providers would be entitled to some form of tax relief, and the ability of non-profit making organisations to reclaim VAT and other taxes would depend on an annual evaluation of their performance. Government grants would be subject to stringent audit and evaluation.
The report, Voluntary Action, follows three years' research by three former advisers to the Home Office Voluntary Services Unit, funded by the Home Office, public, private and voluntary sector sponsors.
After a survey of 2,000 local and national organisations it concludes that 'while some bodies retain a pioneering sense of purpose and moral vision, others have evolved into moribund dinosaurs - hogging grants and donations that could be better spent elsewhere'.
The report proposes that organisations should be divided into two new sectors according to whether they choose to work as 'agents of the state', competing for publicly subsidised contracts. Non-profit or 'third sector' organisations would work in partnership with the Government, competing for funds as part of the growing 'contract culture'.
'First force' campaigning organisations would be supported by donations from individuals, private companies and charitable trusts and lose state support. These groups, which the report calls 'authentic' voluntary bodies would be 'free to pursue ideals, change and reform'.
On charitable status, the report argues that 'charity, administered as a formal concept by the Charity Commission, has become meaningless.
'The categories under which organisations can be registered lack coherence and prevent some genuinely philanthropic concerns from obtaining tax relief, while including more doubtful ones such as private schools.'
The National Council for Voluntary Organisations, which represents 600 national organisations, says the proposals would undermine charitable works and believes the campaign sector needs regulation to protect the interests of donors and the public.
Save the Children said the split into service provider and campaigners imposed an artificial division between charities when most were involved in both types of work with one dependent on the other.
David Woodhead, national director of Isis, the Independent Schools Information Service - which represents 1,368 independent schools, most with charitable status - said one immediate effect would be for schools to push up fees.
Roy Evans, chairman of the trustees of Centris, the research group which produced the report, said it was intended to stimulate public debate at seminars later this year.
Voluntary Action, published by the Home Office, is available from the Home Office Library, 50 Queen Anne's Gate, London SW1.