Scrapping tax-free shopping for tourists is dealing a £1.2bn blow to British business. Paul Barnes, chief executive at the Association of International Retail, explains how the government should think again.
British travellers visiting any European Union country this summer are in for a pleasant surprise. They can now claim the VAT back on their shopping, making their purchases up to 20% cheaper. Brits already spend around €5m (£4.2m) a week on tax-free shopping in Europe – more than €250m (£215m) a year. As international travel picks up following the easing of Covid restrictions, and more British people learn about this new discount, it is likely this figure will exceed a €1bn (£850m) a year.
While this is a Brexit bonus for British travellers and great for EU economies, it is a calamity for British businesses and yet another blow to the already struggling British retail and tourism sectors.
It didn’t have to be like this. While Brexit has opened up a market of 60 million Britons who can now shop tax free in the EU, it could have simultaneously boosted British businesses by extending the same internationally recognised tax-free system to 450 million EU citizens when they travel here. Britain could have become the shopping capital of Europe.
“Britain could have become the shopping capital of Europe”
This would have been a huge boost for UK retail, tourism and the wider economy – particularly in Britain’s regions, as local airports largely serve European destinations. That growth in EU tourism would have made a huge contribution to levelling-up regions across the UK.
But the decision to end the tax-free shopping scheme for all, rather than extend it to EU visitors after Brexit, is having an even more damaging impact on the UK economy.
The Treasury believed that adding 20% to the cost of shopping in the UK would have little impact on people’s decisions to visit and spend here. The independent Office of Budget Responsibility disagreed, stating that retail spending by international visitors would fall by around 40%, wiping out £1.2bn of sales. However, early evidence of international visitor behaviour suggests the damage to the UK economy will be even worse than expected.
A recent study of global brands shows just how badly the UK government’s decision to be the only European country not to offer tax-free shopping is hitting the UK’s international appeal.
The study, based on fourth quarter of 2021, looked at how spending by key international shoppers had recovered in the EU and the UK compared with the same period in 2019. For visitors from the US, retail spending in the EU in 2021 stood at 91% of the 2019 level. In the UK, it was a mere 49%.
More shockingly, spending in 2021 by Gulf State visitors – some of the world’s biggest spenders – more than doubled, rising to 153% of 2019 levels in the EU. In the UK, it struggled to just 61%. The study also found that virtually all the increase in EU countries was spending diverted from sales that were previously made in the UK.
While these high spenders are choosing Paris and Milan over London, the UK is losing out on their spending in our hotels, restaurants, and cultural and leisure institutions. All of which means less VAT for the government. Just a 15% drop in spending in these areas turns any VAT gains the Treasury was hoping to achieve into a net loss. These early figures suggest Treasury is actually going to lose out.
With the return of international travel, it is time for government and industry to get together to seize the opportunity of Brexit and create a new tax-free shopping scheme that will make the UK the world’s go-to shopping destination.
Author: Paul Barnes. Drapersonline