Bill Petty, a senior VAT manager with Ernst & Young, predicted the rule change could cost local government an extra £150 million in VAT.
Under the new Customs and Excise regime, which comes into force from 1 April, each council department will have to separate out VAT exempt and taxable activity and apportion the VAT accordingly.
At present, councils can ignore VAT incurred in providing goods and services that contain an element of tax exempt activity - such as leisure services - as long as it is less than 5% of the total VAT claimed back from Customs in a year.
'It is bound to cause extra work and even delay reclaims of VAT and hit council finances. At worst it will actually result in authorities being unable to reclaim certain of their VAT costs.'
He added: 'Council finance departments should start preparing for what could be an administrative nightmare.'