[UPDATED] Reaction continues on UK’s reversal of VAT-free shopping plan

By Luke Barras-hill |

Reaction from travel retail and the wider tax refund and advisory communities continues to pour in following the government’s announcement on Monday (17 October) to shelve a proposal to re-introduce a tax free shopping mechanism for non-UK visitors.

In a spectacular U-turn, newly appointed Chancellor Jeremy Hunt – appointed over the weekend after the sacking of his predecessor Kwasi Kwarteng –  has reversed nearly all the tax cuts outlined in the controversial ‘mini-budget’ in late September.

Speaking ahead of the government’s medium-term fiscal plan due to be announced in the coming weeks and in an attempt to reduce market speculation, Hunt said: “While we will continue with the abolition of the Health and Social Care Levy and Stamp Duty Changes, we will no longer be proceeding with the cuts to dividend tax rates, off-payroll working reforms introduced in 2017 and 2021, the new VAT-free shopping scheme for non-UK visitors or the freeze on alcohol duty rates.”

The Chancellor of the Exchequer Jeremy Hunt will deliver the full medium-term fiscal plan, to be published alongside a forecast from the independent Office for Budget Responsibility, on 31 October. Source: Gov.uk.

Reserve judgement on decision, urges UKTRF

As reported, the government had outlined its intention to introduce a digital tax free shopping mechanism for international visitors as part of the erstwhile Chancellor’s ‘mini-budget’ announcement on 23 September in a huge boost for the industry after persistent and concerted lobbying efforts.

In a statement from the UK Travel Retail Forum (UKTRF) obtained by TRBusiness, Nigel Keal, Chair, UKTRF, said: “The government’s latest U-turn on tax-free shopping is a huge blow to the travel retail industry and the airport community.

“With the recovery of international travel still delicate, last month’s announcement of a new airside VAT-free scheme offered our sector hope for the potentially difficult months and years ahead. We are incredibly disappointed that the Government has already turned its back on its pledge, which was unanimously welcomed by businesses and passengers alike.

“The UK is one of the only major economies not to have a VAT-free shopping scheme in place, making us globally uncompetitive.

“We appreciate difficult decisions must be made, however as the economic situation worsens, and the cost-of-living crisis threatens to impact international travel, we urge the government to reserve judgment until it has carried out a full cost-benefit analysis to fully understand the potential opportunity.”

UKTRF says it is encouraging the new Chancellor to consider what other tools he has at his disposable to help the sector, such as the introduction of arrivals duty free stores.

Source: gov.uk.

‘Short sighted and misguided’

The rowback on the tax free shopping scheme is a hit for industry supporters that had welcomed the former Chancellor’s announcement as helping to address the ‘competitive disadvantage’ suffered by travel retail businesses after the post-Brexit axing of the VAT Retail Export Scheme and airside extra-statutory concession that took effect in January 2021.

It was gathered that the recently proposed VAT refund for tourists to Great Britain was intended to cover goods purchased on the High Street, plus airside shopping post-security at airports and other departure points of sale in a scheme to be introduced by HM Treasury in partnership with HMRC.

A spokesperson from the Airport Operators Association (AOA), which represents the interests of UK airports, told TRBusiness: “The decision to stop the reintroduction of VAT free shopping for international visitors is a short-sighted and misguided move that will hold back our aviation, travel, and tourism’s recovery from the pandemic.

“It leaves us at a competitive disadvantage compared to our European neighbours and risks acting as disincentive for international visitors to travel to the UK. We urge the Chancellor to reconsider this U-turn and reintroduce VAT free shopping for international visitors alongside the introduction of arrivals duty free to boost our industry and the UK economy.”

In a LinkedIn post, Fraser Brown, Retail Director at London Heathrow Airport, called the decision ‘a bitter disappointment’.

“At a time where the country needs all the growth it can get as we recover from the most difficult period in our history, this tourist tax remains a significant headwind. Introducing a new modern tax-free shopping incentive for overseas visitors would result in a net-gain to HM Treasury with billions more in taxable spend in retail, hospitality and leisure from millions more tourists each year.

£2 billion saving per year, says Chancellor

“Doing the opposite would cause further regression of high streets, shopping centres, ports and airports as we continue to lose out to our European competitors. We urge the government to work with industry on implementing an internationally competitive scheme at pace to maximise growth and we will continue to engage constructively with ministers on the growth benefits of travel retail to the British economy.”

Derrick Hardman, Managing Director, UK & Ireland at tax refund specialist Global Blue – which together with Heathrow Airport and Dufry-owned World Duty Free mounted a legal challenge over the initial decision to slash airside tax free and VAT RES that ultimately ended in defeat at the High Court – said: “The reversal of planned tax free shopping for the UK is shortsighted.

“The Chancellor’s decision on Monday not to proceed with a new digital high-street and airside tax free shopping scheme for the UK means we continue to be at a significant disadvantage to our European competitors. The opportunity for the UK to become the new ‘go-to’ shopping destination for both EU and non-EU visitors was enormous.

“Not only supporting UK high streets and our airports, but all the British brands that sustain high-skilled manufacturing jobs across the UK. I strongly urge the Chancellor to reconsider this policy. It could become one of the key drivers of growth for the UK by bringing high-value tourists back to our shores.”

Addressing the House of Commons on Monday afternoon (UK BST), Hunt claimed the removal of the proposed VAT-free shopping scheme for non-UK visitors would save the UK £2 billion per year.

Alison Horner, Indirect Tax Partner at MHA, commented: “It is disappointing to see the retail export scheme added to the bonfire of mini-budget measures. It was a small change but would have been great for retailers. The UK operated a similar scheme while it was an EU member (the Retail Export Scheme for non-EU visitors) so the plan didn’t break new ground.

“However, if it had gone ahead the impact of VAT-free shopping would have been a welcome boost to retailers but not enormous in the grand scheme of things. Given the crisis it is understandable the new Chancellor decided to stick to carrying through the National Insurance reversal and throwing away everything else.”

This is an updated version of an article first published on Monday 17 October.

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