A report by the Audit Commission reveals the council may have to pay £200,000 in VAT to HM Revenue and Customs.

The disputed VAT claim relates to a set of land transactions carried out two years ago in order for the Cattle Market redevelopment to go ahead.

Robert Davies, Audit Commission officer, presented his report to the council's performance and audit scrutiny committee on Monday.

"The council has been advised that there is a potential VAT liability arising from arrangements relating to the Cattle Market development. These arrangements are currently being investigated and, therefore, the final liability has yet to be determined.

"As a result of this issue, a contingent liability of £200,000 has now been included within the financial statements," his report said.

Chris Barber, deputy chief of finance, said the issue arose from an annual VAT inspection which looked at the council's capital schemes and land transactions.

The liability claim relates to land transactions in 2006 to support the Cattle Market redevelopment and subsequent interest lost by HM Revenue and Customs, he said.

"According to our more bullish advisers, there should be no question of interest or penalties arising – but to be prudent we have included a liability for the worst case scenario.

"This is an ongoing discussion. It is not an investigation so much as questions raised from a complex set of land transactions," Mr Barber added.

Liz Watt, chief finance officer, said: "We have known about that issue for some time and at the time of the final accounts in June, I was of the opinion there would be no liability at all.

"Since then, HM Revenue and Customs have written to say they think there may be a liability.

"The sum of £200,000 is the worst case scenario and the biggest possible liability that might exist.

"I don't think we will have to pay anything like that much. I do hope we will not have to pay anything at all."

A council spokeswoman said the contingency liability would be funded out of council reserves.

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