Weekly tax brief

British retailers reapply pressure for the return of tax-free shopping

14 February 2023
The Mayor of London, Sadiq Khan, has written to the chancellor asking for the return of tax-free shopping for overseas visitors to Great Britain. The letter, co-signed by 20 leading figures in the retail and travel sectors, calls for the reinstatement of this VAT relief, which was abolished in all parts of the UK except Northern Ireland when the UK left the EU’s VAT system on 1 January 2021.

Before Brexit, the UK operated the VAT Retail Export Scheme, which allowed participating retailers to make a post export refund of VAT to customers on goods when the customer exported them to a non-EU destination. However, to the surprise of many, who had expected the scheme to be modified to include exports to the EU, the government instead decided to scrap these VAT refunds for overseas visitors. VAT now has to be paid on all purchases unless the customer arranges to have the goods delivered directly from the UK retailer directly to an overseas address. At the same time, the government also decided to limit duty free sales at ports and airports to alcohol and tobacco products, with ‘tax-free’ sales of other goods such as electronics and clothing being withdrawn.

The abolition went ahead despite strong opposition from many stakeholders 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.

In September 2022, a new version of the scheme was proposed by then chancellor Kwasi Kwarteng, although no introductory date was set. However, a few weeks later, after the resignation of prime minister Liz Truss, the proposal was withdrawn by new chancellor Jeremy Hunt. A number of major retail brands expressed their disappointment with the decision, regarding the lack of such a refund scheme in the UK as a continued disincentive for tourists to visit Great Britain, and putting British high-street retailers, airports and travel retail at a substantial disadvantage to other European destinations for tourists.

Fast forward to 2023 and Sadiq Khan’s intervention has shown that the sector has not given up its campaign. His letter estimates that such a scheme could boost tourist spending on shopping in London by £2bn, along with an additional £1bn on other goods and services such as hotels, restaurants and leisure activities and would help create thousands of jobs. Rebutting previous assertions by the government that the benefits of the previous scheme were largely restricted to London, the signatories to the letter argue that London’s success in attracting overseas visitors is vital not just to the capital, but to the “whole UK economy”.

Not everyone agrees with this view. Some commentators have questioned the net benefit of tax-free shopping to the country once the cost is factored in of paying VAT refunds to tourists who would have visited and shopped here anyway. It has also been suggested that the existence of the scheme may have the effect of increasing the VAT exclusive retail prices of goods popular with overseas shoppers, so there might in practice be little real savings to be made by customers.

The real benefits of tax-free shopping to the UK economy would seem to depend on whether its reintroduction would result in more tourists choosing Great Britain as a destination. Whatever the reality, even the illusion of savings may be enough to attract some away from other European cities who have refund schemes in place.

While it is unclear how the government will respond to this latest intervention by the Mayor of London, in an already difficult trading climate for retailers, we can be certain that this issue isn’t going to go away for the foreseeable future.