At present, while VAT is not charged on most food and drink, or hot baked goods, it is charged on takeaway food sold to be eaten hot.
After the government U-turn, VAT will not be charged on pasties, pies and sausage rolls that are fresh from the oven and cooling down on shelves. But savouries that are being kept hot in heated cabinets will still be liable for VAT.
Earlier this month, in Greggs’ interim financial statement, the firm’s chairman Derek Netherton predicted that plans to charge VAT on baked foods fresh from the oven would be “unworkable.”
“What we cannot support is the government’s current proposal to extend the standard rate of VAT to freshly baked food, where there is no attempt to keep it hot and which is not designed to be kept hot,” said Netherton.
A simpler solution for the government and consumers would be to charge VAT on all food kept hot for sale in a heated environment after cooking, all food re-heated to order and all food supplied in heat-retaining packaging, he advised. “This would clearly differentiate between fresh bakery food and food that is being sold intentionally hot,” said the firm.
Savoury sales account for more than a third of Greggs’ turnover.
Labour has slammed the government’s U-turn describing it, together with a decision to cut tax on static caravans, as “a total shambles”.
Chris Leslie, Labour MP for Nottingham East, told the BBC Radio 4’s the Today programme: “This government is showing it can’t think things through before introducing changes.”
Rachel Reeves, Labour's shadow chief secretary to the Treasury, said: “These partial U-turns, just a few weeks after ministers were defending the pasty tax and caravan tax, show just how ill thought through the budget was and how out of touch David Cameron and George Osborne are.”
MPs from all the main parties slammed the government’s proposals during a parliamentary debate last week. The plans were unenforceable and would lead to lost jobs and damaged businesses, they argued.
A Treasury spokesman said: "After extensive engagement we have improved the policy, addressing practical concerns, ensuring that the new regime could be as simple as possible to apply.
"We have addressed these in a way that allows us to remove the inconsistent VAT treatment, while not imposing any additional requirement on businesses to test the temperature of their products.”
Meanwhile, The Sun newspaper, in an article headlined 'Pastie la vista taxman', said the decision would be “celebrated by the clanging of oven doors around the country.”