Committee report scathing of UK’s tax free U-turn

By Luke Barras-hill |

[UPDATED] The UK government’s fleeting revival of tax free shopping for foreign visitors and its subsequent removal demonstrates ‘the inadequacy of the Treasury’s original analysis of its impact’, a Commons Committee has found.

In a cutting report* published yesterday (24 October), MPs from the cross-party Digital, Culture, Media and Sport (DCMS) Committee branded the post-Brexit removal of the VAT Retail Export Scheme (VAT RES) as ‘a spectacular own goal’, ‘short-sighted’ and ‘incredibly damaging’ to UK tourism.

Former Chancellor Kwasi Kwarteng had announced a new digital, VAT-free shopping scheme for non-UK visitors in the so-called ‘mini-budget’ on 23 September, reversing the government’s axing of tax free shopping on the High Street and at airports post-security, but the plan was shelved by the Treasury’s new incumbent Jeremy Hunt on 17 October.

The report on how the tourism sector can recover from the pandemic blames the government’s ‘paucity of thought’ in committing to offering the mechanism before reversing it and its failure to conduct new analysis around the latest policy change.

The Committee stated it saw no evidence that the Treasury considered the effect on an inbound and domestic tourism industry worth 9% of UK GDP.

Chancellor of the Exchequer Jeremy Hunt said the scrapping of the recently proposed digital tax free shopping scheme would save £2 billion a year.

‘Inbound sector ‘too reliant on London’

It recommends that the government should publish an assessment of the direct and indirect impact that withdrawing the VAT Retail Export Scheme will have on inbound tourism.

It says a broader analysis of such benefits – something industry stakeholders have been calling on for some time – ‘would demonstrate that its cost would be far outweighed by the revenue it would generate’.

“For the government to fix on a policy without ensuring it had the full facts first is extraordinary,” stated the report.

Chair of the DCMS Committee and Conservative MP Julian Knight commented: “The scrapping of tax free shopping for overseas visitors has been a spectacular own goal from the government, with the subsequent on-again off-again flip-flopping symptomatic of an approach that lacks thought and recognition of the huge importance of retail to inbound tourism.

“Taking such decisions without the full facts is no way to make policy and has already harmed the industry on which so much of our economy depends. In an increasingly competitive global market, Britain cannot just rely on its reputation alone to attract visitors. It must make it easier for people to travel and access the full range of outstanding attractions all over the country. Ministers must now wake up to the voice of the industry and finally recognise its value.”

The report states that government policies ‘have made the industry’s job harder rather than easier, by making it more difficult for visitors to visit and less likely to spend’.

UKTRF continues push for review

DCMS Committee MPs noted in the report: “We find it astonishing that the Minister and the Treasury were unable to tell us what assessment was made of the impact on the number of tourists coming here, not just in terms of raw visitor numbers but also the indirect benefits of their staying here.

“We are led to conclude that either the Treasury did not consider this or, if they did, gave little weight to DCMS’s warnings of its potential devastating impact on the industry. The government fixed on its policy without ensuring it had the full facts before doing so. To make such a decision without considering its indirect impact, not just the direct one, is extraordinary and has already harmed the industry on which so much of our economy depends.”

A spokesperson from the Treasury said: “The Chancellor has made clear that the UK’s public finances must be on a sustainable path. As part of the UK’s commitment to fiscal discipline, the government will not be proceeding with plans to introduce a new VAT-free shopping scheme.”

Nigel Keal, Chair, UKTRF: “We continue to encourage the government to conduct a post-implementation review of the policy, and to welcome input from industry.”

Reacting to the report findings, UKTRF Chair Nigel Keal told TRBusiness: “The report by the Culture, Media and Sport select committee confirms what UKTRF and others have been saying since the government took the decision to make the UK one of the few countries in the world that does not offer tax free shopping at airports.

“At the time we noted the decision appeared to have been taken without any impact assessment or analysis of the effect it would have on UK airports, ports and travel retailers. We continue to encourage the government to conduct a post-implementation review of the policy, and to welcome input from industry.

“As the travel retail industry endured the worst effects of the Covid pandemic, the loss of tax free shopping dealt a further, entirely unnecessary, blow to our industry. We urge the government to reinstate airside tax free shopping, and to rethink its decision to shelve the policy mere days after it was announced last month.”

Welcoming the Select Committee’s report, Heathrow Airport agrees there is a need to undertake a full assessment of the direct and indirect benefits of introducing a new tax free shopping mechanism to ensure the UK becomes an attractive destination for tourists.

Fraser Brown, Retail Director, Heathrow Airport, told TRBusiness: “This tax on tourism remains a significant headwind for economic growth, while introducing a new incentive would result in a net-gain to HM Treasury and maximise the potential of high streets, shopping centres, ports and airports.

“We urge this new Government to work with industry on implementing an internationally competitive scheme ,and we will continue to engage constructively with Ministers on the growth benefits of travel retail to the British economy.”

Among the other findings, it warns that the inbound tourist sector is too reliant on London and there is a ‘worrying’ lack of money for marketing.

The UK handled around £500 million in VAT refunds in 2019 while it was still in the EU.

Aligned with World Trade Organisation rules, Britain was given the choice of extending VAT-free shopping to Europe or abolishing it altogether and chose the latter.

The independent Office for Budget Responsibility had previously estimated a direct Exchequer saving of around £400 million per year once passenger numbers recovered from Covid (on the assumption 20-30,000 fewer tourists would visit Great Britain annually).

Chancellor Jeremy Hunt said more recently on 17 October that cancelling the latest proposed digital tax free mechanism would save £2 billion per year.

The government has two months to respond to the House of Commons Committee report.

*The second report related to the inquiry into Promoting Britain Abroad was published on 24 October. To read the full report, click here.

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