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VAT Free Shopping

As the Government looks to plug the cap from the huge costs of COVID, both tax rises and cuts are inevitable.  According to the Office for Budget Responsibility, it is estimated the pandemic will cost the Government anywhere between £263-£391 billion for the financial year 2020-2021. The Government borrowed £128 billion for the first three months of the pandemic. There are a number of initiatives the Government will be introducing over the next 12 months to plug this gap.  One of those is to end the VAT Retail Export Scheme (VAT RES), or in simple terms to end VAT Free Shopping for tourists.

What is the VAT Retail Export Scheme?

The VAT Retail Export Scheme is also known as Tax-Free Shopping.  It allows international visitors to the UK to reclaim the VAT on purchases in the UK.  Non-European visitors can claim the VAT back on goods they export in their personal luggage.  They must however consume the goods outside of the UK.  Non-EU tourists spend £3.5 billion in tax-free sales each year.

It benefits tourist hotspots, especially those areas renowned for shopping.  London is a huge attraction for foreign shoppers with big department stores such as Harrods and Selfirdges.  Dedicated shopping centres such as Bicester shopping village and other retail complexes such as the Trafford Centre, benefit hugely.  Bicester Village, the luxury shopping outlet in Oxfordshire has reported a big loss in sales.  VisitBritain claims 72% of Chinese visitors to the UK go shopping during their trips, with Bicester a big attraction for many of them.

VisitBritain reports tourist spend £6 billion on shopping, and as mentioned above £3.5 billion were registered as tax-free.  Other countries in Europe offer similar benefits to overseas visitors.  One of the major benefits to each country, is the boost it gives to their tourism industry.

What is the Government proposing?

The Government are proposing to abolish the VAT Retail Export Scheme on 31st December.  This is in line with when the Brexit transition period ends.  Their rationale for ending the scheme is the huge cost it incurs, plus the fact it offers very little benefit to large parts of the UK.  The Treasury also claim it is open to fraud and it is difficult to police.

The Governement are concerned the scheme will need to be extended to EU visitors once the Brexit deal is finalised.  This will be a huge burden on the tax authorities, both financially and from an administrative perspective.

What is the impact of ending Tax-Free Shopping in the UK?

Rishi Sunak has received a huge backlash, especially from the leaders of some of the UK retail giants such as Selfridges, Marks and Spencer and Heathrow Shopping.  They claim tourists who come to the UK with the sole intention of shopping, will simply go to other European cities such as Paris, Madrid and Milan.  They go on to say the UK will potentially be unable to compete with Continental Europe.  Retail giants and travel bosses claim the move could put 70,000 jobs at risk across the retail, hospitality and leisure sectors.  They go on to say it could cost the economy almost £6 billion a year to the UK tourist sector.

It is a big balancing act for the Government.  They know there are huge gaps to plug and each initiative they introduce will be unpopular, although necessary to some extent.