The UK has a VAT Retail Export Scheme (VAT RES), which means that people visiting from other countries can reclaim the VAT they paid on items they buy here to take home. It doesn’t apply to anything consumed here. This is hugely attractive to wealthy visitors who spend thousands of pounds during their stays in the UK.
Chancellor Sunak announced that this scheme will end in December 2020 because of Brexit. A government spokesperson said: “Less than 10 per cent of non-EU visitors to the UK use the VAT refund shopping scheme and extending this to EU visitors could cost up to £1.4billion a year.”
The Association of International Retail (AIR) wrote an open letter to Chancellor Sunak expressing their “surprise and disappointment” at this decision.
What’s the problem with abolishing tax free shopping?
There has been a huge outcry against this move from the retail sector. They have been absolutely hammered by the impact of COVID-19 and widely regard this to be a dreadful decision. And this isn’t just coming from the luxury brands that will directly lose sales. The wider economic ecosystems that rely on those wealthy visitors will also suffer, as they simply take their money to another city that does give them tax free shopping.
It will mean that Britain will be the only European country that doesn’t offer VAT free shopping.
Why wouldn’t shoppers, especially luxury goods shoppers, not simply go to another city? And why would luxury brands invest in, or continue to maintain, outlets in the UK, when they can see that their sales will be comparatively lower?
Head of AIR, Paul Barnes, said: “Madrid, Milan and Paris are rubbing their hands with glee at this self-inflicted wound. If we charge a fifth more for the same goods, international visitors will not hesitate to switch their city breaks to other countries, and the stores and jobs will follow within months.”
Who signed this letter?
CEO’s from businesses in retail, tourism and travel industries signed the letter. And, as you can see below, this isn’t just a London Mayfair problem. This affects the whole of the UK.
These are the 21 signatories of the letter to Chancellor Sunak:
- Steve Rowe, Chief Executive, Marks & Spencer
- Anne Pitcher, Managing Director, Selfridges & Co.
- John Edgar, Chief Executive, Fenwick
- Hugh Seaborn, Chief Executive, Cadogan
- Brian Duffy, Chief Executive Officer, Watches of Switzerland
- Robert Sinclair, Chief Executive Officer, London City Airport
- Ewan Venters, Chief Executive Officer, Fortnum & Mason
- Emma Degg, Chief Executive Officer, North West Business Leadership Tam
- Inderneel Singh, Managing Director, Edwardian Hotels London
- Neil Raimi, Chief Executive, West Midlands Growth Company
- James Raynor, Chief Executive, Grosvenor Britain & Ireland
- Brian Bickell, Chief Executive, Shaftesbury
- John Holland-Kaye, Chief Executive, Heathrow Airport
- Stewart Wingate, Chief Executive Officer, Gatwick Airport Ltd
- Nick Barton, Chief Executive, Birmingham Airport
- Derek Provan, Chief Executive Officer, ASG Airports (Aberdeen, Glasgow, Southampton)
- Liam Cunningham, Maybourne Hotel Group
- Jose Luis Duran, Chief Executive Officer Europe, Value Retail Europe Management, for Bicester Village
- Mark Bourgeois, Managing Director UK and Ireland, Hammerson plc
- Ian Hawksworth, Chief Executive, Capital & Counties Properties plc
- Clive Memmott, Chief Executive, Greater Manchester Chamber of Commerce
- Alan Morgan, Chief Executive Officer, GLH Hotels
In their press release, AIR highlights several important elements of the letter. Firstly that tax free shopping schemes are available in many countries around the world. Local taxes are waived in order to “attract tourist spending across the wider economy”. It’s also an acknowledgement that lots of international visitors will have to pay import duties when they get back home.
They say, “Most counties have long-since digitized their schemes, something that the letter highlights that the HMRC has been promising and failing to deliver for years.” The signatories to the letter “have offered to implement such a solution immediately at no cost to the tax-payer”, if the Chancellor scraps the plan to stop tax free shopping.
It’s that important for their businesses.
Tourism will take a hit
Vice-chair of Value Retail, James Lambert, said: “Global travel and tour operators have made it clear to large retailers that they are already looking for alternative destinations for their customers where they can shop more economically. Paris, Italy and Germany, for example, all offer VAT returns on purchases.
Bicester Village, the West End of London and luxury stores like Selfridges and Harrods will be affected, but so too will the regions. Between them, Edinburgh, Glasgow, Manchester, Leeds and Liverpool attract £225m in spending from tourists.”
And it could affect your pension fund, in the long term…
Many of the most expensive London properties are owned by British pension funds. Luxury brands will no longer be able to justify paying their extortionate rents, if the tourist trade disappears.
The companies won’t suffer financially, they’ll just move to another European city that does have tax free shopping.
But that means having to charge smaller rental income, diminishing the value of the properties. In turn, over time, this decreases the value of the pension funds who own them.
Smaller retailers may be eliminated entirely
There are a great number of small British retailers creating beautiful bespoke products for the luxury markets. But they won’t be seen, and sold, if international tourists simply spend their money somewhere they can get a tax saving.
What is the Chancellor’s response?
A Treasury spokesman said: “We’re making use of the end of the transition period to bring our personal duty and tax systems in line with international norms. This was subject to a full consultation, and VAT-free shopping is still available because retailers are able to offer it to overseas visitors who purchase items in store and have them sent directly to their home addresses.”
It’s obvious to most people that this pay and post option is not going to be popular, particularly from a security perspective.
There has not yet been a full response to the specific items in the open letter from the Treasury. We’ll have to wait and see if the Chancellor decides to reverse this decision once he’s rethought some of the earlier conclusions about its impact.
