Some of Britain’s biggest companies are among thousands that have stopped paying business taxes to councils, creating a £2.5 billion “black hole” in town hall budgets, The Times has learnt.

Households face higher council tax bills and cuts in services after local government chiefs said that companies were asking to defer payments or were failing to pay them altogether.

Some of the deficit is caused by the closure of about 8,000 businesses since January. The admission comes as about a tenth of local councils’ cash reserves – £900 million – remains locked in Icelandic banks.

The shortfall is leading to severe cashflow problems in some authorities that rely on regular payments from businesses to help with staff salaries.

The troubled retail giant Woolworths wrote to every council with a store in its area to announce that it was suspending payments of business taxes, known as national nondomestic rates, and cancelling its direct debits to councils. The company will move payments due in the last quarter of this year to after Christmas.

Some councils have agreed the new payments timetable, but others have refused and are seeking to collect the money as normal. Woolworths said that it paid a year’s worth of the tax in advance and was suspending payments until it was no longer in credit with the councils. A spokeswoman said: “Woolworths Group is currently in credit in terms of its business rate payments. On that basis we are simply rescheduling payments on account.”

Local authorities collect more than £17.5 billion from businesses as the equivalent of a commercial council tax to cover services such as cleaning, street lighting and refuse collection.

The whole sum is in theory passed back to the Government for redistribution to councils, weighted by population and need. In practice, authorities keep what they would have been allocated each month and pass the rest on or wait for a government top-up.

In the 12 months to April, business receipts fell by £1 billion, a significant proportion of annual income. This is predicted to more than double over two years.

David Clark, director-general of Solace, the society of local authority chief executives, said that pressures on local councils were increasing. The housing market crash had led to a drop in income from developers, who usually contributed to infrastructure costs. “The impact a recession will have on councils will be far greater than any challenges posed by the Icelandic crisis,” he told The Times.

Mr Clark said that at least another £1.5 billion would be lost in business taxes this financial year. “It’s going to get much worse over the next few months as the downturn bites further. We will lose at least £2.5 billion over two years in business rates,” he said.

Councils fear that if they have to absorb the losses they will have to cut social care for the elderly and close libraries. “Part of our grant is paid by the business rate. If it falls, the Government will either have to borrow more to honour the settlement or reopen it. We have had no reassurances from Hazel Blears [the Communities Secretary] that spending agreed in 2007 will be guaranteed,” Mr Clark said.

Tony Travers, local government expert at the London School of Economics, said: “Council funding is locked in a straitjacket. Any marginal change in their financial position – be it because of Icelandic banks failing or smaller and slower business rate payments – risks having a magnified impact on services and council tax.”

A spokesman for the Department for Communities and Local Government said: “There are well-established arrangements to deal with variations in business rate yield that means local authorities are not affected.”

Meanwhile, the Conservatives have called on the Government to sanction a tax deferral for small and medium-sized businesses with cashflow problems. George Osborne, the Shadow Chancellor, said that these companies should be allowed to defer their VAT bills for up to six months.

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