May 23, 2022
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Luxe sector calls for return of UK VAT-free shopping as spending plummets

May 23, 2022

Luxury businesses in the UK have renewed calls for the British government to reverse its decision to end VAT-free shopping for high-spending tourists. It comes as international visitors start to return to Britain but not in large enough numbers meaning tourism shopping remains suppressed due to the higher prices of luxury goods.

Affluent tourists who once came to the UK are now shopping in Paris, Milan and elsewhere in Europe - Phot: Pexels/Public domain

Walpole, the luxury sector trade body, and 250 luxury brands, said Monday that tax-free shopping in Britain must be revived if the country wants to rival the recovery being seen in Europe. 

Its new tourism report highlights the value of luxe tourism to the UK’s economy, plus the government action that’s needed. It said the reintroduction of the VAT RES scheme “could result in direct retail sales of at least £1.2 billion and attract an additional 600k visitors”.

It added that the decision to abandon the scheme is estimated to have resulted in a 38% drop in retail sales to non-EU visitors. High-end tourism in the UK was worth £30 billion in 2019 alone, but it said “Britain is struggling to recover to pre-pandemic levels”.

Tourists shoppers were crucial to UK luxury businesses pre-Covid with the ability of those from outside the EU to claim back the 20% VAT levied on the goods they bought being a big attraction. And while many in the luxury industry had hoped the scheme would be extended to visitors from the EU after Britain left the trading bloc, in fact the UK all-but-cancelled the scheme. Shoppers can no longer buy VAT-free goods at the airport and can now only claim back the VAT on items they buy in Britain if they have their goods shipped home separately rather than carrying them with them.

The government estimated that the new rules would allow it to collect massive amounts of VAT that were previously being refunded. However, the retail and luxury industries argued that shoppers would simply choose to go elsewhere and the VAT the government was hoping to collect wouldn't materialise because spending levels would drop. This is what appears to have happened.

The Walpole report includes testimony from retailers and other luxury tourist-focused businesses about the role that tourism played in Britain’s economy pre-pandemic. Back then, tourism (domestic and international combined) contributed to 4% of GDP and had an overall value of £85 billion. 

Some £30 billion of this was attributed to high-end tourism and visitors who come into this category spend 14 times more than the average visitor. Walpole said £1 spent by those staying in high-end accommodation in the UK generates £8 of value in other industries, including luxury retail. This in turn supports the 160,000 jobs across the UK luxury sector.

Walpole also said Britain has “undoubtedly lost its position as the favoured destination for high-spending international tourists” since Brexit and Covid and this this is “largely due to the government decision to abolish tax-free shopping (the VAT Retail Export Scheme – VAT RES) in 2020, making Britain the only European country not to offer tax-free shopping to non-EU tourists”.

An HMRC survey ahead of VAT RES officially ending saw 69% of International visitors saying the opportunity for tax-free shopping influenced their decision to visit the UK. 

But Walpole added: “This has resulted in a significant shift for international visitors, who are heading to France, Italy and other EU destinations over the UK and is already reflected in the UK’s international visitor retail spend post-Covid.”

It said, for example, that spending on shopping by visitors from the Gulf Cooperation Council (GCC) in the EU in Q4 2021 was at 153% of Q4 2019 levels. In the same period GCC spending in the UK was at just 60% of 2019 levels. For US visitors, in the same period, retail spend in the EU returned to 91% of pre-Covid levels, while in the UK it was only at 49%. 

“Due to these high-spending visitors choosing Paris and Milan over London, the UK is losing their spending in hotels, restaurants and cultural centres costing the Treasury millions in lost VAT”, Walpole stressed.

Walpole CEO Helen Brocklebank concluded: “To say that it has been a challenging few years for the UK tourism industry would be an understatement, however we are now in a position where the UK can open its doors to the world and welcome back international tourists – especially those high-end tourists who are looking to spend in our luxury hotels, restaurants, shops and cultural venues up and down the country, all the while aiding economic growth and job creation.”

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