Wales’ biggest council has agreed to pay £16m to settle a bill over landfill tax dating back 10 years.

Cardiff council said HM Revenue and Customs (HMRC) had ruled some firms should have been paying more to take soil and other materials to its former Lamby Way landfill site.

The local authority said there was no suggestion of any impropriety or illegality, only a dispute over definitions and categorisations about the materials.

Cardiff said it had initially faced a bill of £45m which had been reduced to £12m after negotiations, although it will rise to £16m with interest payments.

The issue came to light during a HMRC landfill tax audit in January 2017.

“Landfill tax rules changed around the time issues arose, and this contributed to the confusion,” said Chris Weaver, the Labour council’s cabinet member for finance.

The Lamby Way landfill site was closed in 2015 but the council said soil was needed to help contour, cap and remediate it.

Landfill tax is charged at two rates depending on the material and whether it is processed or unprocessed.

During the period affected by the dispute, the standard rate of landfill tax was between £82.60 and £86.10 per tonne, while the lower rate was between £2.60 and £2.70 per tonne.

Liberal Democrat councillor Rodney Berman said: “Paying out £16.2m now that wasn’t previously budgeted for will be a massive hit to the council’s finances which it can ill afford.

“We must now have a full and open inquiry into what went wrong and why the Labour-run council has blundered in such a spectacular way.”

Companies that took material to the site included one owned by a businessman who made a controversial donation to former First Minister Vaughan Gething’s campaign to secure the job.

The council cabinet will consider a report recommending acceptance of the settlement at a meeting on Thursday.

It will also be asked to approve plans to puruse any outstanding, unpaid landfill taxes following HMRC’s re-categorisation of soil taken to the site.