Just days before becoming prime minister, Gordon Brown has made it clear Holyrood would not be getting any more money from central government beyond the current block grant.
Later David Cairns, a Scotland Office minister, said this included holding back the council-tax rebate, worth about 400 million, if Scotland changes the system of local taxation.
This means the Scottish Executive would have to fund any shortfall in changing the system of local taxation from its current budget of around 30 billion, which is used to pay for Scotland's schools, hospitals and roads.
And it signals the latest fight between the SNP and Westminster as Mr Brown takes office and Mr Salmond becomes increasingly keen to push through promised SNP reforms.
During the election, the SNP pledged to replace council tax with a local income tax and last week the idea was backed by the majority of the Scottish Parliament.
However, the Labour Party claims the system proposed by the SNP, which would cap local income tax at 3p in the pound, would leave the Scottish government with a 1 billion black hole.
Yesterday, Mr Cairns made it clear that if the system of local taxation is changed, the 400 million currently reserved for council-tax benefit would not be diverted from direct spending to the Scottish block grant - where it would help meet any shortfall.
"The council-tax benefit is a benefit paid in relation to the council tax, full stop. If there isn't any council tax then there isn't any council-tax benefit," he said.
"The reality is the Executive has thousands of millions to spend. They can live within their means and they should."
However, Stewart Hosie, deputy leader of the SNP Westminster group, insisted the 400 million is part of Scottish funding and should remain in the block grant. "The council tax rebate is designed to reduce the amount of local taxation that local people pay.
"If the Scottish government choose the nature of Scottish taxation to change, from the unwanted council tax to a fair local income tax, and they require that money still, then I am sure they will make a case to the Treasury for that," he said.
A Scottish government spokesman added: "This is not an issue about more money. It is not acceptable to have less money because the previous Scottish government chose a different policy north of the Border."