A group of Subway franchisees is fighting to have the VAT on toasted sandwiches zero-rated in a case that could have implications for retail bakers and coffee shops across the country.

Around 250 Subway franchisees supported a recent appeal at a tax tribunal that toasted Sub sandwiches should be zero-rated for VAT. Subway’s products are currently taxed at the standard rate of VAT (17.5%), because HMRC classes them as hot takeaway food, but this will rise to 20% in January when VAT rates are increased.

Subway franchisee Kay Mulligan, who runs a store in Huddersfield, argued that the application of heat was necessary to supply a toasted sandwich, a process which irreversibly altered the composition of the bread. Her intention, she said, was to supply a freshly prepared toasted sandwich, not to supply a heated sub to be consumed hot.

The tribunal rejected the claim, but the franchisees plan to appeal to the Upper Tribunal next year. Some VAT cases can go as far as the Court of Appeal and the European Parliament.

If the ruling is appealed, it could clarify the position for smaller craft bakery chains in respect of VAT on their toasted sandwiches and products including paninis and savouries, said Dipak Jotangia, partner at Dass Solicitors, which represented Subway at the tribunal.

He told BB that retailers, including Quiznos and McDonald’s, were currently paying zero rate VAT on near-identical products and that this gave them an unfair advantage. "In the past, some tribunals have agreed that even products such as sausage rolls and Cornish pasties were correctly zero-rated," he said. "It’s definitely worth considering the VAT position very carefully on these kinds of products."

In a statement, Subway said: "Subway franchisees feel strongly that the HMRC’s decision is inconsistent with its VAT policies toward other toasted sandwich sellers and shops. The chain believes this uneven tax policy will unfairly impact its pricing and will cause unnecessary hardships for its franchisees during a period of economic weakness. Franchisees in the UK feel strongly that the finding of the tribunal is wrong and will continue to robustly challenge it with further appeals."