Charities are set to make dozens of staff redundant and some could go bust after the freezing of a key European funding stream.

The crisis also means disadvantaged young people including those with disabilities, mental health problems and care leavers are being left without support.

The European Commission (EC) has suspended payments of vital employability cash over alleged auditing irregularities.

At least 15 charities are affected by the freeze on more than £20 million of money for work with disadvantaged young people. Councils working to help relieve poverty by helping people facing barriers to finding work have also been left high and dry by the move.

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The European Social Fund (ESF) grants are targeted at 16-29 year olds who need extra support to join the workforce, including young people leaving care, people with learning disabilities, people with mental health problems, the long term unemployed and those coming out of prison.

The move is disastrous for charities according to Anna Fowlie, chief executive of the Scottish Council for Voluntary Organisations (SCVO). She said the money was already tightly regulated and charities were in the dark about what the EC's concerns were.

She added: "SCVO has been working with Scottish Government and colleagues in the voluntary sector since this potentially devastating situation emerged. We have had concerns about the process for managing European funding for some time and have been pressing Scottish Government to address them.

"Third sector providers have been working in good faith with the most vulnerable people in our communities who desperately need support into work. While the delay or even loss of this funding hits local authorities hard, it looks increasingly likely that longstanding and successful third sector organisations will go out of business.

"That is not only awful for those organisations and their staff, it has a huge impact on the people they support. The situation has now become urgent and Ministers need to intervene and find a solution now, keeping the sector included and informed at every stage.”

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SCVO is part of a consortium also comprising the charities Apex, Enable & Right Track which makes use of ESF funding. Other charities affected include the Prince's Trust, Barnardo's, and Action for Children.

Apex Scotland has already had to issue redundancy notices to around 20 staff members in anticipation that it will not be able to continue to pay them, and will be unable to complete work with nearly 300 young offenders who face barriers to employment.

Chief executive Alan Staff said: "We have just been told about this funding being suspended in the last fortnight, and are coming to grips with the implications."

"We have been instructed not to take any more referrals and finish off the work we are doing.

"Nobody has suggested any problem with what we do - we are audited to extinction and back. This may get resolved in time but by then our staff will have gone and people's confidence in us will be undermined. I think the Scottish Government need to make some sort of contingency funding available.

The Commission's concern appears to be that Scottish Government and Skills Development Scotland do not have rigorous enough controls over how the money is spent and what is achieved with it.

The Scottish Government was allocated a budget of £412 million to cover the period 2014 to 2020, which it distributes to charities and councils via Skills Development Scotland (SDS).

But last month the government wrote to SDS warning that funds had been frozen and adding that it could not step into the breach: "The Scottish Government cannot afford to fund programmes of this size without the ability to reclaim the full costs from the EC."

The letter said European funding chiefs had concerns about the standard of public procurement procedures, the relationship between spending and outcomes for the young people involved, and excess spending on staff costs.

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It says officials are striving to rectify the situation but warns the funding freeze is likely to continue until late 2019, and asks that SDS be prepared to prove spending has been above board. "It is for you to ensure that any evidence provided can be verified and will withstand robust scrutiny," the letter adds.

A spokeswoman for the European Commission said: "These audits are standard and happen everywhere. There were some issues with the functioning of the management and control system". However she said she was unable to clarify what the issues were or how quickly they would be resolved.

A Scottish Government spokesperson said: “We absolutely understand the concerns of the SCVO and Scotland’s third sector providers. That’s why Ministers are determined to avoid any charity or third sector body going out of business as a result of this issue. Instead, we are working to resolve this situation as quickly as possible.”