Chancellor George Osborne has backed down on his controversial "pasty tax", which would have seen a 20% rate of VAT added to hot baked foods.
The tax will no longer apply to hot food that is allowed to cool naturally, but from October it will still apply to cooked foods that are kept warm such as rotisserie chicken.
The unpopular tax, announced in the Budget, has faced a backlash from bakery companies across the UK, such as Greggs, which has seen its shares jump by 7% in response to the U-turn.
"This is fantastic news for the customer more than anything," says Ken McMeikan, chief executive for Greggs.
"If we had to put up prices by 20% in the current marketplace when consumers are having a very difficult time we expected there would be an impact on sales but we don't know what it would have been. I think the government deserves to be applauded," he adds
George Bull, senior tax partner at Baker Tilly, says he welcomes the change.
“These taxes would have created an even greater burden for British businesses as well as for the overstretched local consumer. At a time when the economy needs as much support as it can get, I’m delighted to see that common sense has prevailed.”
The Treasury has also scrapped plans for 20% VAT on static caravans and this will instead be 5% from April 2013.