'Officials from Customs and Excise turned up at the council out of the blue and began interrogating staff', director of social work Allan Bowman said this week.
The council has been told it owes £520,000 backdated to 1986 in unpaid VAT on money transferred from the local health board to the council to pay for Care in the Community. 'We've been told we are being seen as a test case as far as Customs and Excise are concerned', Mr Bowman said.
A report to committee on Tuesday warned that the retrospective liability would 'create considerable difficulties for the regional council who would be required to pay the VAT and to reclaim it from the health board'.
Fife Health Board has agreed to contribute £1.2 million a year to this initiative.
'If the health board has to pay VAT at 17.5% it may have difficulty in making the required contribution to the cost of the care, thus putting the whole programme at risk', the committee was told.