Review suggests ‘tourist tax’ end might be a step closer

Is the so-called UK tourist tax nearing its end game? Strong and persistent pressure by the UK retail industry to reverse the government’s stubborn support of ‘tax’ could well be paying off.

Chancellor Jeremy Hunt is understood to have asked the Office for Budget Responsibility (OBR) to look at whether VAT-free shopping for tourists should be brought back.

If successful, it would be a major shot in the arm for UK retail, especially at the luxury end of the market, as well as a much needed boost to the hospitality industry.

But we shouldn’t assume too much at this stage. There’s been a false dawn before with the short-lived Liz Truss government saying that the decision to scrap tax-free shopping for tourists that coincided with Brexit would be reversed. However that decision itself was reversed when the current Prime Minister and Chancellor of the Exchequer took over.

The OBR has been asked to “examine the costs and benefits” associated with Rishi Sunak’s decision to end tax-free shopping schemes for tourists in 2020. As chancellor under then-PM Boris Johnson, Sunak had announced that overseas visitors would no longer be able to reclaim VAT on shopping purchases.

Richard Hughes, chairman of the OBR, said the government spending watchdog would publish its conclusions alongside the Budget next month.

The review comes “in the light of subsequent evidence on international visitor numbers and their consumption patterns and the analysis carried out by a number of outside bodies”, Hughes said in a letter.

There have been a number of reports citing the benefits of VAT-free shopping’s return and last week, the Centre for Economics and Business Research (CEBR) said the tourist tax is “deterring two million foreign visitors from coming to the UK and costing the economy £11.1 billion in lost GDP”. 

The ‘tax’, which is basically the removal of VAT-free shopping for international visitors to Britain post-Brexit, is claimed by the British government to be the right move for the country that keeps money in its economy and avoids benefiting only visitors from abroad.

Almost everyone (except the government, so far) seem to think bringing back the perk’s a good idea. On Monday, Jacqui Baker, partner and head of retail at audit, tax and consulting adviser RSM UK, said: “The impact of scrapping tax-free shopping can’t be ignored. We know international visitors are coming to the UK as the luxury hotels market is seeing strong demand, but they’re holding off from shopping until the next leg of their European tour, so countries such as France and Italy benefit instead.” 

She added: “It will be interesting to see the finding of the OBR’s review to confirm what retailers are seeing – a direct correlation between the change in tax and consumer behaviour.”

And New West End Company chief Dee Corsi added: “The news [of] a review is a milestone moment in our three-year campaign to return the policy. The evidence, and calls from business, are clear – tax-free shopping would have a net positive effect on tax revenues and make British businesses competitive once more.

“It is hard to overstate the opportunity in front of us. Reinstating tax-free shopping would allow the UK to recapture tourist spend which has leaked across the Channel, whilst simultaneously making us the largest and closest tax-free shopping destination for 450 million EU residents.

“We already have the infrastructure and reputation to support the influx of spend and footfall that tax-free shopping would bring, and the benefits would be felt across the nation – from regional airports and luxury manufacturing hubs to the West End.

“Reintroducing tax-free shopping presents the Government with a golden opportunity: to inject growth back into the national economy, with a tried and tested scheme which will be delivered by businesses and has cross-party support. We would urge the Government to grab it with both hands.”