Caterers could soon be selling cheaper pre-packed sandwiches at workplaces after the Court of Appeal ruled they should not be subject to VAT.
In a case brought by Compass Group in relation to its outlets at the BBC, the court ruled that sandwiches sold by contract caterers should be exempt from the 17.5% tax.
The decision could cost the taxman millions of pounds a year.
Lord Justice Mummery said: "The individual customers are simply buying and being supplied with sandwiches in the same way as if they were buying them and being supplied with them zero-rated from another available retail outlet."
An earlier tribunal had ruled that VAT was applicable because the sandwiches were made "in the course of catering" rather than as a retail transaction.
But the judge said: "It makes little sense that they should be made liable to pay VAT in the one case, but not in the other. Compass is no more making supplies of sandwiches ‘in the course of catering' than the supermarket chain with a section set aside in its store for the sale of sandwiches."
Her Majesty's Revenue and Customs may appeal the decision to the House of Lords for a final ruling.
A Compass spokesman said the company would await the outcome of any appeal but added: "We are satisfied with the outcome of the case so far."
VAT specialist Andy White of Campbell Dallas chartered accountants said: "This ruling could have implications for other firms which are contracted to supply food from within other businesses' premises."
By Tom Bill