Tax-free shopping for UK-bound tourists under review

Tax-free shopping for visitors to the UK could be reinstated as early as next month after Chancellor Jeremy Hunt asked a government watchdog to review the costs and benefits of the decision to stop tourists being able to reclaim VAT on purchases, which came into effect at the start of 2021.

The Office for Budgetary Responsibility is to review the calculations it made three years ago and publish the results alongside Mr Hunt's budget next month.

In a newly emerged letter to Conservative back bench MP Sir Geoffrey Robert Clifton-Brown in December, the head of the OBR, Richard Hughes, said: “We will undertake this analysis in the first months of 2024 with an aim of publishing its conclusions alongside the spring budget.”

In 2020, Rishi Sunak, who was UK chancellor at the time, decided that international tourists would no longer be able to claim the VAT back on their purchases because it was deemed to be costing the economy too much.

At the time, the OBR forecast that terminating tax-free shopping would save £1.8 billion ($2.26 billion) by the 2025/26 fiscal year but added that the figures were highly uncertain.

The payment system company Global Blue found in 2022 spending by GCC tourists was 1.5 times higher than during the pandemic in France, Italy and Spain, compared to the UK, where it was less than 0.7 per cent higher.

The Treasury would give no more details on the review of tax-free shopping, telling The National it does not “comment on Budget speculation”.

“We keep all taxes under review and recognise the value that retailers bring to Britain,” a Treasury official said on Monday.

“That is why we announced a £4.3 billion business rates package at Autumn Statement to support businesses and the high street.

“VAT-free shopping remains available for all non-UK visitors buying items in store and having them sent directly to their overseas address.”

There has been widespread criticism among retailers and tourism industry leaders to the halting of tax-free shopping with many claiming the OBR's figures ignored the wider effects on tourist numbers and spending.

On Monday, fashion designer Sir Paul Smith said his clothing shop previously expected up to a third of business to come from tourists but that had fallen away since the tax was brought in. He welcomed moves to halt it, saying London needed to compete with other cities.

'Spectacular own goal'

Last year, the Centre for Economics and Business Research said it cost the UK economy £10.7 billion and deterred 2 million tourists from coming to the UK.

“Despite our analysis showing clear economic benefits associated with a VAT refund scheme and demonstrating the analytical errors in the government’s calculations, the decision to terminate the scheme was upheld,” the think tank said at the time.

The argument is that visitors, especially high-spending tourists, have been drawn to cities like Paris and Milan after the scrapping of tax-free shopping in the UK.

"The government’s original assessment concluded that tax-free shopping would exert no behaviour change, whereas we know that even the well-heeled have some sensitivity to price," Steven Medway, chief executive of the Knightsbridge Partnership, which represents businesses in one of London's most upmarket shopping districts, told The National.

"We are currently at a price disadvantage relative to places like Paris and Milan.

"At a more general level, Oxford Economics has estimated that tax-free shopping would bring in £4.1 billion in additional revenue and support 78,000 jobs in the UK.”

According to the retail lobby group, New West End Company, 57 per cent of all spending in London's West End came from international tourists in 2019, a figure that fell to 44 per cent by 2023, after tax-free shopping had been halted.

Meanwhile, when asked last year, 77 per cent of international visitors to London said they would spend more if they could claim back VAT on their purchases. This number rises to 93 per cent for the highest-spending customers.

Dee Corsi, chief executive at New West End Company, told The National: "It is hard to overstate the opportunity in front of us – reinstating tax-free shopping would incentivise current international visitors to spend, while simultaneously making us the largest and closest tax-free shopping destination for 450 million EU residents.

"This latest indication from the Chancellor is the most positive to date and we are hopeful that the OBR’s assessment of the policy will reflect the benefits already outlined by industry.

"What makes tax-free shopping such a golden opportunity is that we do not need to reinvent the wheel – we know the scheme works and it is already internationally recognised and understood by consumers," she added.

The removal of tax-free shopping hit many upmarket retailers hard. The British accessories group, Mulberry, closed its shop on London's Bond Street last year, citing the 'tourist tax' as the principle reason. Gerry Murphy, chairman of fashion group Burberry, referred to the decision to drop tax-free shopping as a “spectacular own goal”.

The British Chambers of Commerce and the Federation of Small Businesses launched a new campaign to bring back tax-free shopping claiming when it was dropped three years ago, visitors to the UK experienced overnight price hikes of 20 per cent, which delivered “a blow to British businesses at a time when many were struggling to survive”.

“The reality is, every sale diverted from British tills to the European continent puts at risk the wages and livelihoods of thousands reliant on retail and the domestic side of its supply chain.”

Mr Hunt has been attempting to reduce speculation of big tax cuts in his spring budget in March.

“It does not look to me like we will have the same scope for cutting taxes in the spring Budget that we had in the Autumn Statement,” Mr Hunt told the BBC.

“And so I need to set people's expectations about the scale of what I am doing because people need to know that when a Conservative government cuts taxes we will do so in a responsible and sensible way.”