A right Royal missed opportunity for tax-free shopping?

Recent reports have estimated that London hosted over 30,000 additional overseas visitors over the first two weeks of May encompassing the Coronation. In addition, ahead of the celebrations, the Centre for Retail Research predicted that spending by foreign visitors here for the Coronation festivities could be higher than £320m.

Many retailers will have been delighted by the boost in trade brought about by the Coronation but for some, it could be considered a missed opportunity due to the lack of VAT relief on foreign visitors’ shopping. Amongst that number may be the Burberry chairman Gerry Murphy who reportedly confronted the prime minister at a recent business summit over the government’s 'perverse' decision to remove VAT refunds on foreign visitors' shopping. Various other retailers have also called for the reinstatement of this VAT relief which was abolished in all parts of the UK (excepting Northern Ireland) when the UK left the EU’s VAT system on 1 January 2021.

Prior to Brexit, and in common with other EU Member States, the UK operated the VAT Retail Export Scheme. The scheme allowed non-EU visitors to the UK to reclaim the VAT they incurred on purchases made from high street retailers, provided the visitor took the goods home with them in their luggage.

To the surprise of many retailers, who had in a post-Brexit world expected the scheme to be widened to include overseas visitors from EU, the government instead decided to scrap VAT refunds for overseas visitors entirely. Overseas visitors to Great Britain must now pay VAT on all purchases unless the customer arranges to have the goods delivered directly from the UK retailer to an overseas address. In a double whammy for the retail sector, the government also decided to limit duty free sales at ports and airports to alcohol and tobacco products, and withdraw ‘tax-free’ sales of other goods such as electronics and clothing.

The abolition of these schemes – widely labelled as the ‘tourist tax’ - has been deeply unpopular with many UK retailers who relied on tax-free shopping to generate strong sales in airside outlets and boost trade in tourist heavy areas such as London’s West End and other UK cities and retail centres. The key criticism is that the ‘tourist tax’ acts as a disincentive for tourists to visit Great Britain and puts British high-street retailers, airports and travel retail at a substantial disadvantage to other European destinations by driving tourists away from London to cities such as Paris, Madrid and Milan.

Not everyone agrees with this view though. There are question marks over the net benefit of tax-free shopping to the country once the cost of paying the VAT refunds to tourists who many believe would have visited and shopped here anyway is factored in.

While the Treasury estimates the scheme would cost at least £2bn a year in lost taxes, it has also been suggested that the scheme may have the effect of increasing the VAT exclusive retail prices of goods that are popular with overseas shoppers, so there might in practice be little real savings to be made by overseas visitors. HMRC has also struggled with the challenge (and cost) of digitising what was a paper-based refund system, while at the same time ensuring any new system was sufficiently robust to withstand attempts of systematic fraud.

The real benefits of tax-free shopping to the UK economy ultimately depend on whether its reintroduction would result in more tourists choosing the UK as a destination and spending more here. The prime minister will not want to be seen to simply cave under pressure. Any U-turn will likely centre on whether the government believes the significant cost of its reintroduction would outweigh the overall benefit to the wider economy.