The “excessively high” fee the government charges children to register as a British citizen effectively removes their entitlement to citizenship, the high court has heard.

The Project for the Registration of Children as British Citizens (PRCBC) argues the “exorbitant” £1,012 registration fee, for an application which costs the Home Office just £372 to process, is unlawfully high. The charity says many children who are entitled to citizenship, having been born in the UK and lived here for their first 10 years, are prevented from applying because of the cost.

The case, which is supported by Amnesty International UK, is being brought on behalf of two children – identified as A and O – but the PRCBC said the outcome could affect tens of thousands of people in the UK.

Opening the PRCBC’s case on Tuesday, Richard Drabble QC said setting the fee at £640 more than the administrative cost “involves a conscious decision to raise a sizeable surplus ... for use elsewhere in the immigration system”. He told the court the fee was “unaffordable” for a “large number of would-be applicants” who were entitled to British citizenship, who he said would “also be living in poverty, or with severely limited means”.

During a protest before the hearing, Solange Valdez-Symonds, the director of PRCBC, said the case emphasised the importance of children’s citizenship rights, which had been “forgotten, neglected, and stamped on”. Valdez-Symonds added: “The children we are talking about are not migrants, they don’t have immigration problems. They were given statutory rights to register as citizens.”

She described the fee to register as a “big obstacle” for children entitled to citizenship and said there were dire consequences for those who could not afford to register. “Children are at the moment either being detained, removed to countries they’ve never been or their lives are in limbo. They have fears and nightmares on a day-to-day basis without the citizenship that their friends have. It’s a daily, daily suffering for these children.”

In a statement submitted as part of the proceedings, O, aged 12, said: “I was born in England in 2007. I have never travelled to another country. I don’t want to tell my friends that I am not British like them because I’m scared. I worry that if my friends find out, they won’t understand that I really am British like them.

“I enjoy playing netball for my school team. My team have been abroad twice for netball tournaments, but I could not travel because I do not have my British passport.”

Lisa Incledon, a volunteer for Amnesty International Children’s Human Rights Network, said: “This is a generation of children who are going to become the next Windrush generation, where they are being shut out because they didn’t get their citizenship. The government is making £645 profit on every application, so where we should be supporting children’s rights, they’re profiteering from children’s rights.”

She added: “Citizenship is really important, but it’s not a commodity, it’s a right. And to put a price on it, to be charging children who have a right to citizenship, so you can get funds to prop up the immigration system is indefensible.”

The British Nationality Act 1981 ended birthright citizenship and states people born in the UK are automatically British citizens if one of their parents is a British citizen or one of their parents is settled in the UK. The act makes a provision for children with parents without settled status, but who are born or grow up in the UK, allowing them the right to register as British citizens.

The case challenges the profit element in all cases and the lawfulness of charging any fee where a child cannot afford it. The judicial review claim asks the Home Office to reduce the registration fee so it is no more than the administrative cost, introduce a fee waiver for children who cannot afford the fee and provide a fee exemption for children in local authority care.

The Home Office keeps all fees under review. In written submissions, Sir James Eadie QC, for the Home Office, argued the entitlement to British citizenship was “conditional upon payment of a fee and always has been – it is not an unconditional statutory right”. Eadie said that “if any particular applicant is genuinely unable to pay the fee, their ability to acquire citizenship is not lost; it is postponed until they can”.

The case will be heard by Mr Justice Jay at the royal court of justice over the next three days. More than a dozen children and supporters held a lively demonstration outside court on Tuesday before the hearing. The children were chanting: “Passports, not profit. We are not for sale.”