Deferring water charges for a further three years would drain the Executive’s budget of over £1bn, the Belfast Telegraph can reveal today.

And additional costs including annual capital charges which could be imposed on Northern Ireland Water could push the cash gap closer to £2bn.

While ministers remain minded to extend the current deferral — underpinned by extra cash from the Treasury — the crippling costs could mean they may have to bring in the charges sooner than they had hoped. And that could mean consumers being forced to pay the tap tax from next year or soon afterwards.

“This is a ticking timebomb,” Fred Cobain, chairman of Stormont’s Regional Development Committee which is monitoring water charges, said. “I cannot see how they can avoid having to go ahead with charges.”

The Department for Regional Development (DRD) which will implement the policy has already identified a cash shortfall of around £200m for the current 2009-10 year, arising from the Executive's decision to defer the introduction of additional household payments announced last November. And apart from capital costs the DRD admits there is further risk if Her Majesty’s Revenue and Customs (HMRC) decides to end a freeze on charging VAT, which would push the total loss closer to £2bn.

The existing agreement with HMRC, which allows NI Water to retain the cash it would have to spend on VAT, was on the basis of household payments being introduced from 2010 at the latest.

The £2bn total comprises the total cost of running the service and essential investment, as well as the addition of the VAT and annual capital costs.

A private paper seen by this newspaper argued: “The Department is not in a position to engage with HMRC until the Executive has decided its long-term approach.

“The additional VAT costs could be up to £60m in 2009-2010 if the existing agreement no longer remains in place. Up to £130m would be involved if HMRC sought to recover VAT payments for 2007-2008 and 2008-2009.”

Ministerial guidance papers, released for consultation, said: “The costs of deferral for a three-year period, excluding risks, are of the order of £1bn.

“That is, the total projected cost for water and sewerage services/investment over the 2010-13 period is of the order of £1.6bn (excluding risks)”.

The financial factors which could increase the cost of providing water and sewerage services across the province is complex.

But DRD Minister Conor Murphy, who is proposing a further deferral, is aware of a funding requirement of £1bn to continue to deliver services, maintain infrastructure and meet mandatory standards.

Internal documents seen by the Belfast Telegraph also show the reclassification of NI Water from public corporation status to a central Government body — because of the ongoing deferment of water and sewerage charges led to a £33.7m capital shortfall in the last financial year which the Executive was unable to meet “due to the overall public expenditure position”.