Local councils could be forced to pay VAT on a range of services in areas where they compete with the private sector after a European Court of Justice recommendation on off-street parking.

Councils had taken HMRC to court, alleging that they did not have to pay VAT because they were not competing with the private sector in the parking area.

But the ECJ said that, in assessing the issue, any competition that was more than negligible would result in the councils paying VAT. It also said that an overall verdict on the issue needed to be reached, rather than simply working it out on a council-by-council basis.

Marc Welby, VAT partner at BDO Stoy Hayward, said other council services could be affected, including crematoria, welfare and child-care services.

Welby led the case for the councils and added he was optimistic they could win when the case comes back to the High Court because there was no evidence councils competed with the private sector. He said any resolution to the case would be unlikely for at least another year.