Tax free ‘could inject £10bn into UK economy’

By Simon Warburton |

Passengers shopping at Heathrow Airport

Passengers shopping at Heathrow Airport. Photo Shutterstock.

Reintroducing tax free shopping could boost the British economy by £10bn ($12.8bn) while at the same time reinforcing existing jobs and creating tens of thousands of new ones, says a report by the Centre for Economics and Business Research (CEBR) for J&H Communications.

The UK government decided to axe almost all forms of tax free shopping in the wake of Brexit, including at airports and downtown, but its potential re-emergence as a perk for overseas visitors has gained considerable traction of late.

Many high-profile luxury goods companies, including Mulberry, Burberry and Harvey Nichols, have criticised the absence of tax free shopping, whose restoration the CEBR estimates could outweigh losses associated with VAT refunds to the tune of £2.3bn.

In April this year, Burberry Chairman, Gerry Murphy slammed the post-Brexit withdrawal of tax- and VAT-free shopping and called on ministers to think again.

Open letter to UK Chancellor Jeremy Hunt

Some 350 business leaders, including heads of BA, Marks & Spencer, Harvey Nichols, Primark, Jigsaw, Kurt Geiger, Heathrow, Gatwick, Burberry and Mulberry, have signed an open letter to British Chancellor, Jeremy Hunt, calling the move “a spectacular own goal”.

The issue has garnered cross-party support in Parliament calling for the so-called ‘tourist tax’ to be scrapped, while campaign leader Sir Rocco Forte said Paris, Milan and Berlin “can’t believe their luck” as visitors spend their money outside the UK.

Heathrow (LHR) has enthusiastically backed the debate, citing the “damage” that the withdrawal of the extra-statutory concession on airside purchases (excluding liquor & tobacco) has caused and insisting it ought not to have been culled in the first place after the Brexit transition period.

In reaching its conclusions concerning the benefits of reintroducing tax free shopping, the CEBR report assumed it would be open to all visitors, with previous iterations of the scheme only being open to non-EU visitors.

Passengers at Heathrow airport.

Heathrow is a firm supporter of VAT-free shopping. Photo: Heathrow Airports Limited.

Its calculations represent a best case scenario in which every visitor makes a rebate claim on all eligible purchases. As such, they are necessarily top-end figures.

In practice though, not all tourists would seek rebates. The aggregate effects of tax free shopping in scenarios in which a given portion of eligible sales are claimed by visitors can be modelled as part of an extension to this piece.

Using the scenario of extension to all visitors and a 100% take-up of rebates, the CEBR estimates the following effects:

Spending eligible for tax-free shopping is estimated to have stood at £6.6bn in 2022, rising to an estimated £7.7bn in 2023.

Assuming a 100% take-up rate of VAT rebates, £1.1bn of this would have been returned to customers in the form of VAT refunds in 2022, rising to £1.3bn in 2023.

On a per visitor basis, these VAT refunds would reduce the cost of a visit to the UK by around 4.2%.

Based on the elasticity of demand for international travel with respect to price, this cost reduction would have increased visitor numbers by 1.7m in 2022, rising to 2m in 2023.

The total increase in spending as a result of the scheme would have been £3.3bn in 2022.

This additional spending would have fed into higher output levels via the tourist spending multiplier. This would have amounted to an increase in GDP of £9.1bn in 2022, rising to £10.7bn in 2023.

There would also be employment impacts. A fully utilised tax free shopping scheme would have supported an estimated 172,000 jobs in 2022 or 201,000 in 2023. These estimates include existing jobs that would benefit from the reintroduction of tax-free shopping, as well as entirely ‘new’ jobs.

Taking into account the UK’s tax-to-GDP ratio, the increase to GDP would have increased tax revenues by £3.1 billion in 2022 or £3.6 billion in 2023.

The reintroduction of a tax-free shopping scheme would have a net positive effect on government tax revenues.

The additional revenues generated would outweigh the losses associated with sales tax refunds by £2bn in 2022 or £2.3bn in 2023.

The CEBR is at pains to point out estimates of employment are not all ‘new’ jobs, in that they would be created solely because of the scheme. Rather, these estimates also include existing jobs that would experience greater activity as a result of the wider economic impact of the reintroduction of tax-free shopping, notes the report.

CEBR managing economist, Sam Miley added: ‘This report highlights the scale of the economic opportunity presented by the reintroduction of a tax-free shopping scheme. By making shopping purchases cheaper, tax-free shopping schemes act as an incentive for tourists to visit the UK over other countries.

“During their stay these tourists engage in other activity beyond their retail purchases, bringing a range of economic benefits that will be felt not only on the high street, but right through the retail supply chain.”

Brian Duffy, CEO of the Watches of Switzerland group, which also helped to commission the report, said: ‘This evidence is even more compelling than I anticipated.

“We are aware from our brand partners and published data that tourist spending is bouncing back in the EU in a way that is simply not happening in the UK and this is all down to the absence of VAT-free shopping.

Scheme could cost British taxpayers “around £2bn a year” insists Treasury

HM Treasury however, has hit back at any suggestion the tax perk could see the light of day again in the UK, arguing it is not a major draw for overseas visitors.

An HM Treasury spokesperson told TRBusiness: “VAT-free shopping does not directly benefit Brits – it lets foreign tourists who buy items in the UK to claim back VAT as they return home.

“The scheme could cost British taxpayers around £2bn a year at a time when we’ve already had to take difficult decisions to get debt falling and fewer than one in ten non-EU visitors used the previous scheme, showing it’s not a significant attraction for tourists.”

The Treasury also pointed out evidence from VisitBritain showed key motivators for tourists to the UK are the country’s history and heritage rather than shopping.

Equally, notes The Treasury, Canada and New Zealand do not offer this type of VAT-free shopping on the high street and the US does not have a country wide system, but the countries are popular tourist destinations.

The US is the top non-Asian country on China’s visited list, added the Treasury, ahead of any European country with VAT-free shopping.

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