What is Britain's favourite fast food? McDonald's would like to think it is the burger, and fish and chip shops doubtless reckon the title belongs to them, but research conducted last year by the British Sandwich Association (BSA) and research company Promar International points to sandwiches as the highest grossing fast food in Britain, with total annual sales of £3.26b and a year-on-year growth in value of 13%.

That turnover on its own is an attractive carrot to hospitality entrepreneurs, but it is the spectacular growth in sandwich sales that is driving ever-increasing development in the UK sandwich market.

Equally remarkable is the way sandwiches are seen by almost every layer of the catering industry as an important revenue stream. Such is the profit to be made on sandwiches that high-street retailers, not caterers, dominate the market, and there are some unlikely big players. Top in sandwich sales is a clothes shop, Marks & Spencer; second is a grocer, Tesco; and third is a chemist, Boots. Even Shell petrol stations creep into the ratings in 10th position. The only recognised caterer in the top 10 sales chart is Prêt à Manger.

The sandwich market is not just big, it is dynamic and is expanding on several fronts. The least obvious market for selling sandwiches is emerging from the recent trend of coffee bar concepts. While sweet snacks are the most popular partner for a cup of coffee, the need to maximise customer spend over the lunchtime period has led to all the coffee bar chains offering a premium-priced sandwich menu.

Recipe development for sandwich fillings is intense among sandwich bar chains. Novelty and curiosity are strong selling aids. A Chinese sandwich might sound comical, but Asian fillings were among the most successful new launches last year, with both Indian and Chinese flavours.

There is a paranoia in the sandwich industry about revealing development work on fillings for the year ahead, but most expect Oriental influences to continue, and an outside tip for newcomer is duck.

Just as breads are becoming better, with a huge choice of both English and Continental styles, authenticity in breads is set to be matched by a move towards identifiable regional cheeses rather than amorphous "mousetrap" Cheddar.

Another market change is the way the sandwich-buying public is becoming more aware of organic food. Until recently, organics has not been a subject that affected sandwich selling, but now, fuelled by the fuss over genetically modified food and a wider interest in organic food, this will change. The tag "organic" is likely to be added, not just for health reasons, but to allow sandwiches to command a premium price.

While fillings innovation is developing furiously, unusual fillings remain a minority sector of sandwich sales. The BSA estimates that 80% of total sandwich sales stay loyal to the traditional favourites of chicken, cheese, tuna and ham.

Selling dinner in hotel restaurants is a challenge, but winning lunchtime spend is so hard that many provincial hotels just give up. City centre hotels have a better chance of success.

Stephen Cane, head chef at London's Russell hotel, has been developing a sandwich menu as a means of building lunchtime business. To meet the price point that a hotel needs from any menu item, Cane builds contrasting textures and flavours and uses bread types that work with the filling rather than treating them as just a filling carrier. And he devotes much care to the plate presentation of sandwiches.

Rather than rely on cold, sliced protein, Cane often cooks a sandwich filling from scratch. One of his favourites is a hot Cajun-style chicken sandwich, which is served warm and fills a 10in plate. Cajun-marinated chicken breasts are cooked off; half a ciabatta is split and toasted on both sides; crushed avocado is spread on the base, the chicken placed on the avocado and a topping of crème fraîche added before the top slice of bread. The sandwich is cut in half, skewered to hold it together and served on a plate with a salad and a Caesar dressing for £8.95.

The best seller in this central London hotel is not cosmopolitan, but very British - a roast beef and creamed horseradish sandwich using a 4oz sirloin steak, cooked pink and served with a salad garnish on onion bread and Caesar dressing for £8.95.

For the nation's staff restaurants, sandwiches constitute a huge slice of lunchtime business. The staff restaurant sector has 11% of the entire sandwich market, yet what irks staff restaurants is their VAT inequality with the high street. Customs and Excise regards all food sold in-house as "catering" and liable for VAT at the full rate of 17.5%, while sandwiches bought in the high street are cold take-away food, which is zero-rated.

The rules governing VAT on sandwiches are woolly and complex, but in general, VAT is levied on hot food and those cold foods that are sold for consumption on or near the premises. This means that if there is tabling near the point of sale, VAT is chargeable.

Where it gets confusing is when the food is hot. VAT is charged on any item that has been deliberately heated to be eaten hot, such as toasted sandwiches, reheated hot pasties or coffee, but not if the food has been hot from cooking but is going cool, such as a freshly made meat and potato pie. VAT also applies to mixed hot and cold food, such as hot bacon inside cold bread.

Cold food sold for consumption off the premises, which is what most take-away sandwiches are, is zero-rated. Buy a sandwich in Boots and take it to your desk and that is zero-rated. Buy it in the staff restaurant and take it back to your desk and it is liable for 17.5% VAT because it is being "eaten on the premises" and classified as catering, not take-away. See the contacts panel on this page on how to get more detailed information.

The British Hospitality Association has been battling this tax anomaly for years, and technical services manager Phil Phillips says it will not give up on the issue. "We're in talks at the moment with Customs and Excise," he says. "We're arguing that where a caterer is involved in both staff and public feeding in a building like a hospital, or where there is multi-tenancy in a building where a contract caterer is working, the take-away food should be zero-rated."

Phillips is not thought to be holding his breath for a positive conclusion to the talks.