Following the Government’s u-turn to the proposed introduction of the dubbed “pasty tax”, we can now see the first signs of discontent within the food and drink industry.

Sandwich franchise chain Subway has sought to take action within the High Court against the 20% VAT levied against its supply of toasted subs, and commenced proceedings on 23 July 2012.

Subway see themselves as being penalised for providing toasted sandwiches whereas their competitors, who are merely a few doors away, can provide similar food items without incurring the same VAT liability. This is due to the fact that their goods happen to be warm at the time of sale as opposed to being intentionally provided as a warmed or toasted product.

Subway have argued in the past that they should be included within this group and have drawn on the argument that they are required to heat their products to comply with food legislation in the same manner as their competitors are required to bake pasties before they can be provided to their customers for consumption.

The proposed “pasty tax” would have provided, in the eyes of franchises such as Subway at least, the creation of a level playing field where all suppliers of baked or toasted goods served warm at the time of sale, either intentionally, by coincidence or necessity, would be treated equally for VAT purposes.

If the challenge proves to be successful, it would undoubtedly open the door for other suppliers of hot food to argue that they too should be liable to be taxed at the same rate as baked goods suppliers.

Given HM Revenue & Customs emphasis on the underlying spirit of the law in this area, which has ultimately led to the Government’s u-turn, the likelihood of the challenge succeeding is debatable.

The current position, following the u-turn, has resorted to greater parity with wider case law on the topic and any deviation at this point will undoubtedly lead to further confusion.

If Subway’s course of action proves to be successful, the proceedings may be the first of many with many hot food providers seeing it as paving the way for their own VAT claims. In light of this, we will continue to monitor the outcome of the proceedings with particular interest.