Tax-free UK shopping can help more than just tourists

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Investors do not remember the UK’s disastrous ‘mini’ Budget of 2022 with much fondness. But former prime minister Liz Truss’s proposed abolition of the country’s“tourist tax” is one swiftly-ditched policy that spurs a sense of longing.

The idea of reinstating VAT-free shopping for international visitors was reversed in the aftermath of the ill-fated Budget. But businesses are hoping for a change of heart. Chancellor Jeremy Hunt has ordered the country’s fiscal watchdog to examine whether the policy’s withdrawal at the turn of 2020/21 has boosted the exchequer’s coffers — or is costing the economy.

Independent economic studies suggest the latter. Retail, hospitality and travel companies would all benefit from another volte-face.

Under the original policy, shoppers from overseas were eligible to claim VAT refunds unless they were EU residents. Post-Brexit, the government judged it would have to be expanded to EU visitors. But tax-free shopping was scrapped in 2020.

A Treasury analysis in 2022 suggested that the policy’s reinstatement would cost £2bn in 2025/26. Yet direct costs only tell half the story.

Firstly, the average VAT refund would not be the same for EU and non-EU visitors. Global Blue, the Swiss payments company, has previously estimated the average refund for EU visitors in comparable markets can be up to 63 per cent lower. 

Fresh analysis must also take account of behavioural effects — the extent to which lower trip costs might encourage more visitors and spending. In 2022, the average tourist would have saved 4.2 per cent on their total spending in the UK had the scheme existed, according to the Centre for Economics and Business Research. It suggests that this could spur a 5.4 per cent increase in overseas tourist numbers. Applied to 2022 numbers, that would mean an additional 1.7mn visitors.

Taking such effects, and other factors such as higher taxes from increased tourism employment, additional revenues would have outweighed the cost of VAT refunds by £2bn in 2022, the Cebr estimates.

Official data shows that visitor numbers to the UK are recovering post-pandemic. Just under 11mn overseas residents visited the UK in the third quarter of 2023, up 10 per cent year over year. Collectively, they spent £10.1bn — up 11 per cent, although that figure does not factor in inflation.

Yet Global Blue says data from retailers that operate across global markets suggests visitor spending in countries such as France — where tax-free shopping remains — recovered much faster than in the UK in 2022.

Countries including Italy have a minimum spend before VAT can be reclaimed. That is one way of mitigating the direct impact, although there has been a trend of lowering thresholds. This policy is ripe for re-examination.