The UK Treasury has directly lost £200 million since the UK’s tax free shopping programme was culled on 1 January 2021, Paul Barnes, Association of International Retail CEO, has told a Culture, Media and Sport committee.

The hearing came a week before Chancellor Jeremy Hunt is set to deliver the Autumn Statement. Groups are lobbying for tax free shopping to be reinstated to boost the economy and attract more international travellers.

In addition to the £200m the Treasury has directly missed out on, Barnes calculated that UK retailers have lost £1.5 billion in spend as tourists opt to shop in other countries. 

“Our estimate is that’s probably cost UK retailers around £1.5bn of lost spending that they would have had across the whole of the UK,” Barnes told the Committee.

“We also think that the Treasury, if it had left tax free shopping, and then benefited from all the additional spending from visitors who would come here to do tax free shopping, but are now diverting that their spending to France, Spain and Italy, the Treasury would have been up about 200 million in terms of compared with what they are at the moment.”

The Treasury had claimed that stopping tax-free shopping (effectively a VAT rebate when international travellers leave the country) would have very little impact, Barnes added.

He gave the spending habits of US travellers as an example. In 2022, they were spending double in mainland Europe than they were in 2019. In contrast, spend from US tourists in the UK has only just reached pre-pandemic levels. 

Barnes also noted that the full impact of the policy to remove tax-free shopping was yet to become apparent as Chinese passengers are only starting to travel again. 

“In 2019, a third of all international tax free shopping was done by Chinese people. So when they come back, they’re going to be really important,” he said.

“The data shows they’re much more price sensitive than any other international visitors. If the cost goes up, their spending [goes down].”

He continued: “That £1.5 billion I talked about, it’s not money that’s not being spent. It is still being spent. It’s just we sent it away from Britain, and it’s now being spent in Spain, Italy, France.”

‘Fundamentally’ on the tax free shopping side

Conservative MP for Ashford Damian Green also spoke at the Committee to reaffirm his support for the reintroduction of tax-free shopping.  

“I’m fundamentally on the side of the argument that tax free shopping would actually be beneficial to the economy as a whole,” he stated. 

Responding to a question from Green, Barnes pointed out that the UK is also losing out on spend from Brits, too.

“British people can now shop tax free in Europe,” he detailed. “In 2023 they’re going to spend around £1bn tax free shopping in Europe.” He said bed nights for British tourists in France were up 260% on 2019 levels. A major reason, he said, was because they can now go and shop tax free.

Based on his own “fag packet” maths and VisitBritian data that shows 25% of all tourist spend is on shopping, he extrapolated the value of British tax free shopping in Europe is £1bn. The reverse for Europeans shopping tax free in the UK, he calculated, could be as much as £6-12bn. 

“If you were to say to the Government, here’s a potential growth measure that’s come as a result of leaving the European Union, potentially there’s £12bn in new foreign money coming into Britain every year. And it’ll go to all the different regions. And it’ll happen almost in year one. It’s no big investment or wait for the return. The French have shown it happened in year one.”

He continued: “I just think the government should have a look into that from a growth perspective. Not from a VAT tax loophole perspective.”

Tax free shopping in and out of the airport

Hayley Beer-Gamage, CEO of Experience Oxfordshire, told the Committee that the UK had fallen back in terms of global competitiveness as a result of removing tax-free shopping.

“If you’re looking at a product like value retail, which has a huge brand positioning, a huge following, many people will travel across Europe, and now the world to go to these really high quality, high-end retail experiences,” she began.

“They’re going to be looking at where they can get more bang for their buck. Where can they get better value is going to have an impact.”

She cited the changing perceptions of the Bicester Village shopping destination, close to where she is based. 

“It was always their flagship. People globally always wanted to come to Bicester Village as a flagship, despite building villages across the globe.” This has changed, she said, as tourists make travel plans around shopping affordability and experience. 

Paddy Gamble, Head of Insights, New West End Company, said he had data that showed Paris as a destination was performing much more strongly in terms of spend than London. 

“I talked about the impact that we’re seeing in the West End,” he said, outlining evidence he had given to the Treasury. 

“They weren’t seeing that [negative impact] in their Paris doors, and there was over-performance. You draw the conclusion that the key difference is the lack of tax free.”

Barnes added that it was important to look at data like this in terms of future growth potential, not only what spend has already been lost. 

“We are seeing big brands saying actually, we’ll put our capital investment in Paris, not London, because that’s where the international tourists are going,” he stated.

“We’re seeing the Middle East opening up now. And they’re moving to prepare for their post-petrol economy, it is going to be our international visitors.” He used the World Cup as evidence of this shift in focus. China and the Far East are also investing heavily, he said.

“Britain is a top 10 destination, but we’re falling well back. And the more we fall, it’s a spiral of decline,” he cautioned.

“The brands are saying, ‘Where do I invest in the world?’. We say, ‘Don’t do it in London, because the international shops aren’t going there’. Then we go down and down and down. 

“It’s not just about saving a few million here and a few million there on VAT, which we question anyway. It’s about Britain’s global position, where we have this massive, unique opportunity, having left the European Union, to be Europe’s centre for international shopping. And we’ve given it away to France and Italy and Spain.”

Opportunities for a better system

Despite the downbeat tone, the Committee session concluded with a more hopeful outlook. Beer-Gamage noted that reintroducing tax-free shopping could bring with it a streamlined system. 

She described the old process of reclaiming tax as “an archaic administration scheme”. “It could be simpler, can be more efficient, it could be more effective,” she said.

“Digitising the scheme, I think, is a really positive way forward.”

She also called for other mechanisms to make tax free shopping more beneficial. “You could look at a minimum spend, for example, to help pump more money back into the economy.”

Barnes concluded: “If the government does decide to reinstate it anytime we can build and work with government and business together to build the best tax free shopping in the world.”

In June, Heathrow Airport’s Retail Director Fraser Brown described the UK government’s decision to cull tax free shopping is “an act of economic vandalism”.

Speaking at the TR Consumer Forum, Brown was scathing of the government policy. “It’s completely mad,” he continued. “We are incredibly angry about it, and will continue to fight hard.”