The high profile committee was set up by the NCVO last year in swift response to the alleged links between some UK charities and terrorist activity. The group, which represents a cross-section of charities and stakeholders including Oxfam and the Muslim Council of Britain, has strongly criticised the government’s approach in its first report, published in January.

The report, which aims to feed into the wider Home Office and Treasury joint investigation into the financing of terrorism, has warned that the government’s approach is not in touch with the real work of charities, which can help people turn away from destructive life paths, including involvement in terrorism.

The committee said the government’s response had shown no understanding of charities’ experiences and its heavy handed approach could drive voluntary groups underground. No proper consultation with charities on how best to respond to the terrorist threat had taken place.

“Charities are among the most trusted institutions in the country, a reputation which has been won by acting with integrity and also because they are regulated by the Charity Commission,” said Lord Raymond Plant, chair of the advisory group. “Any action taken by government with regard to charities should be proportionate, based on evidence and be done in consultation with the voluntary sector. Most importantly, it should not undermine the institutions which the government itself endorses as central to modern Britain.”

The NCVO is awaiting the government’s report, due to the published shortly. It hopes it will involved consultation with the sector as a whole on the problem of financing terrorism. “Our hope is that the report will announce a new way of working with the sector in order to address the issue of the terrorist abuse of charities, rather than the unilateral action and uninformed statements that have been made so far,” an NCVO spokesperson said.

It is now calling on the government to protect the independence of the Charity Commission, and not to propose additional regulation of charities without first considering the merits of existing regulation.

Richard Bennett, general secretary of British Overseas NGOs for Development, agreed with the criticisms. “British charities carry out vital work overseas, operating in what are often dangerous and politically charged environments, building bridges between cultures and helping to diffuse the tensions that feed support for terrorism,” he said. “The government must work with our sector to tackle the complex problem of terrorist financing in an overseas context. Heavy-handed action will be counter-productive.”