As the Chief Executive of UTU, a company operating a mobile-first VAT refund service for tourists, Asad Jumabhoy knows a thing or two about tax refunds to global shoppers.

Unpicking the UK government’s recent decision to end the VAT-RES scheme for international tourists, Jumabhoy argues that there exists a crucial opportunity to reform the current VAT refund system to benefit tourism.

The UK Chancellor Rishi Sunak has announced that the country is ending the practice of refunding the VAT paid by tourists, a move that has upset many of the country’s retailers as well as others whose livelihoods depends on tourism.

I know the VAT refund infrastructure intimately, as I helped build the two companies that process nearly all the refunds paid out in the UK and Europe and I remain involved in the industry.

The Chancellor’s decision is altogether fitting and proper: If the choice is between keeping tax free shopping in its current form subsidising certain retailers, and abolishing the current VAT refund system altogether, abolishment is  undoubtedly the right choice.

LARGE FEES CHARGED

But there is a way for the Chancellor to improve tax free shopping to the benefit of all tourism stakeholders in the UK. This is the reformation opportunity that the Chancellor has in front of him.

The problem with the current process is that tourists are charged a large fee which is then shared between VAT refund operators and retailers who assume that it is their refund to give.

The retailers’ complaint against abolishing VAT refunds is that this erodes the incentive for tourists to purchase more in the UK. In fact, the system today already does that by clipping almost half the refund that belongs to the tourist. In the way it is run today, the VAT refund scheme is not much more than a direct subsidy to refund operators and retailers.

Add to that the paper-based process and the typically long queues at Heathrow and it starts to look reminiscent of the 1980s.

The hassle involved in obtaining a refund and the large chunk that is being taken by VAT refund operators results in marginalisation of the benefit to tourism and spending in the UK. In fact, abolishing VAT refunds changes little.

[TRBusiness has established a petition urging the government to u-turn on the decision to axe the VAT RES scheme and tax free sales at airports. Click below to sign the petition].

In a different world, the VAT refund could be an effective tool for attracting tourists to the UK. Since the tourist chooses the product, pays the associated VAT and owns the tax refund, then ostensibly it should be the tourist who chooses their preferred VAT refund operator and not one chosen by the retailer.

Competing shopping destinations such as Italy have reaffirmed tourist ownership and choice in VAT refunding and this is the correct focus for the UK tourism industry; reforming rather than abolishing tax free shopping.

An innovative system where the tourist easily claims their VAT refund, with refund operators looking to deliver value rather than extracting it would auger well for tourism in the UK. Such a change would result in the UK’s pubs, restaurants, tourist attractions and stores receiving a post-Covid bounce from attracting tourist shopping spend.

CHOICE OF REFUND OPERATOR

I hope that the Chancellor’s announcement on cancelling VAT refunds is a gambit to afford the time to implement a reformed and tourist-centric VAT refund system that does not subsidise a few, at the cost of the many. Considering the importance of the tourist industry to the UK, a reimagined VAT refund scheme would affirm Britain’s position as a country that provides the highest standards of service to its tourists.

Additionally, I think that it is important to recognise the contributions to spending which travellers bring to the tourism ecosystem through shopping off-airport and airside. Put simply, off-airport shopping occurs in towns and cities outside the airport, where tourists receive export benefits via the VAT refund system as they pay the VAT when shopping and can reclaim it upon export being validated by Customs.

If retailers are keen to retain tourists’ shopping spend, they need to find a palatable way to retain the VAT refunds and airside shopping export benefits. Protests for the retention of these programmes centre on the price elasticity argument; that the tax – refunded or not charged – incentivises spend, which I believe it does.

Secondly, retaining these programmes will keep the UK competitive vis-a-vis competing European shopping destinations. Therein lies the contradiction between those claiming the benefits inherent in a VAT refund system to attract shopping spend and then deeming it right to decide how much the tourist ought to receive by their choice of VAT refund operator.

All this while using the threat of unemployment and tourists deserting the UK to keep a broken system of refunds going. I believe that the Exchequer should accept the argument made in favour of retail spending, but use the opportunity to reform VAT RES. And the solution is simple.

If the tourist can select the VAT refund operator, which gives them the best or highest value refund, then there is no subsidy going to retailers and VAT refund operators in order to protect the system where traditionally refund operators secure exclusive rights to refund VAT for shoppers at a retailer by sharing ever-growing portions of ever increasing fees with the retailer.

This simple reform and the removal of lines through digitisation at exit points to the country, will increase domestic sales at retailers further, rather than helping themselves to half the refund value. Their own price elasticity and Euro-centric arguments of industry protection should make retailers rejoice that their shoppers can now spend even more.

It will also tease out whether retailers and other interested parties are being true to their claims of serving the shopper. As an aside, Italy already permits tourists to select the VAT refund operator of their choice and export validation at the airport has been digitised. It is this customer centricity which the UK will be competing against.

The views and opinions expressed here are those of the columnist’s and do not necessarily reflect those of TRBusiness.

To read other columns in the series, click the relevant links below. Interested in getting involved? Please contact one of the editorial team at the following: [email protected]; [email protected].

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Alain Maingreaud, President, TFWA Part Two

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