Subway is locked in an ongoing legal battle with UK tax authorities over VAT charges on hot food, M&C Report has learnt. An initial decision that went against the world’s largest sandwich chain means its franchisees are liable for what is estimated to be millions of pounds in unpaid taxes. The two parties remain at loggerheads. It is thought that Subway is appealing following the loss at tribunal against HM Revenues and Customs (HMRC) over VAT charges on toasted sandwiches. Subway maintains that HMRC had previously assured it that toasted sandwiches should be treated in the same way as other sandwiches – and not attract VAT. Sources at HMRC, however, insist that toasted sandwiches have always been classified as “a supply of catering” and are therefore liable to VAT at the full rate. A spokesperson for Subway said: “The Subway chain can confirm that some of its stores in the UK are in discussions with HM Revenue & Customs regarding an attempt to add VAT to the toasted range of subs (sandwiches). “The attempt is a change in policy for HMRC who previously published a Public Notice saying that toasted sandwiches should be treated in the same way as other sandwiches and not taxed.” Jim Pinder, partner VAT services at BDO Stoy Hayward, said that the decision would have a huge impact on Subway – he said that 30p out of every £2 sandwich would need to be paid to HMRC. He said that as each franchisee was registered as a separate company, each would have to now pay VAT and that unless they put their prices up it would significantly impact profit margins. Franchisees are thought to be already charging extra VAT on toasted sandwiches they sell to make up for these costs. One Subway franchisee with between 20 and 30 sites said that the VAT ruling was already having a huge impact on margins and had limited his ability to open new stores. The initial ruling was reached in May 2008. The case has been ongoing since December 2005.