Contract caterers' profits could be boosted by a recent court ruling on the VAT rate for pre-made sandwiches.

The sector has welcomed a ruling by the Court of Appeal that prepacked sandwiches sold in the workplace should not be subject to 17.5% VAT.

In a case brought by Compass Group, the court reversed the decision of a previous tribunal that VAT was applicable because sandwiches were made "in the course of catering" rather than as a retail transaction.

The decision could cost the taxman millions of pounds a year.

Jon Hewett, business development director at Compass division Everson Hewett, said: "Anything that puts an in-house operation on an equal footing with the high street is a positive thing."

Lexington Catering chief executive Tim West agreed. "The next exemption should be sandwiches made to order. We're still a long way from France, where a VAT rate of 5.5%, as opposed to a 21% norm, encourages people to eat at work."

Summing up, Lord Justice Mummery said: "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."

A spokesman for HM Revenue & Customs, which may appeal against the decision for a final ruling in the House of Lords, said it would "review the implications of the decision".

A Compass spokesman said the company would await the outcome of any appeal.

VAT or not to VAT?

Criteria for zero-rated status

• Food is taken away or delivered.
• No cutlery or condiments are supplied.
• Supply of sandwiches rather than meals.
• No service is supplied.

Criteria for standard-rated 17.5% status

• Food is eaten on site.
• Service is more than delivery.
• Food supplied with platters, paper plates and napkins.
• Food supplied above ambient temperature.

By Tom Bill