A “corrosive” legal bid by 20 NHS foundation trusts for business rates relief could threaten the financial viability of some councils.

A judge is due to issue directions in the case, which directly affects 49 councils, on Thursday, Local Government Chronicle reports.

The NHS trusts, supported by property consultants Bilfinger GVA, argue they should be treated the same as charities, which can claim up to 80 per cent business rates relief.

LGC has been told the Local Government Association has informally asked all member councils for a small contribution, believed to be a few hundred pounds, towards the legal costs of the case due to the wider implications for the sector.

Last month, shadow minister for local government and devolution Jim McMahon said councils had put aside £1.6bn for backdated payments over six years in case the appeal is successful, with potential ongoing funding pressures estimated at £250m a year.

City of York Council is one of the councils affected due to the involvement of York Teaching Hospital Foundation Trust in the case. Both the council and the trust declined to comment as legal action is ongoing.

As City of York is part of the 100 per cent business rates retention pilot, it would be effectively liable for 100 per cent of the cost of the charitable relief claim. However, due to the “no detriment” provision in the pilot, City of York would be no worse off than if the council had remained in the 50 per cent scheme but could still face a significant loss of revenue.

LGC understands Norfolk and Norwich University Hospitals FT is also involved in the legal claim.

Vice-chair of the LGA’s resources board John Fuller, who is also South Norfolk Council leader, has called on the government to clarify the business rates status of NHS trusts and warned a successful appeal could open the door for other public sector bodies to launch an appeal.

He said: “It would be a hammer blow to local government finances if these speculative arguments were upheld. I call on the government to stop this corrosive attempt to get local councils and ratepayers to pay their bills.”

Pixel Financial Management director Adrian Jenkins said the litigation could result in a net loss to the taxpayer as any private companies involved in the case are expected to take a percentage of resources transferred from one part of the public sector to another.

He said: “The effect on the 49 local authorities involved will be severe, and will send many to their business rate safety net. If the claim itself is successful it will take the sector as a whole below baseline, wiping-out the business rates growth that has been achieved since 2013-14.

“For individual authorities, some of the impact will be cushioned by the safety net, but it has the potential to threaten the financial viability of some authorities.”

When questioned by Mr McMahon on the legal bid last month, local government minister Rishi Sunak said he was aware of the “scale of the challenge” facing councils due to the case and is monitoring the situation.

At the time he said: “I agree… that if there are to be large transfers of financial resources between different parts of government, it is appropriate that that is done through the government and the normal matter of a spending review, with the priorities being worked out through Parliament rather than through ad hoc decisions of courts.”