Story Highlight
– Britain ended VAT refunds for overseas shoppers in 2021.
– Tourists now prefer Europe, boosting its retail sales.
– British shoppers reclaimed £742m of VAT in EU in 2024.
– The UK loses significant tourist spending, affecting retailers.
– Retail lobby argues for VAT scheme to boost economy.
Full Story
Five years ago, the UK government ceased reimbursing Value Added Tax (VAT) for international shoppers, a decision aimed at refining the tax structure and reducing costs for the Treasury.
Although officials anticipated significant savings from this so-called Tourist Tax, the financial benefits have yet to materialise, while the negative repercussions have been substantial.
As of January 1, 2021, the end of the VAT Retail Export Scheme meant that the UK became the only major European economy to withhold the 20% VAT paid by foreign visitors. This shift was quickly noted by neighbouring countries.
France capitalised on the situation by lowering the threshold for VAT refund claims and enhancing luxury offerings in Paris.
In the aftermath of the pandemic, spending by tourists across the EU has outstripped pre-COVID figures from 2019, while the UK’s rates have only recovered to approximately 90% of that level.
An unexpected outcome of this policy has emerged. Due to Brexit, British tourists are classified as non-EU visitors when they arrive in European destinations, thus allowing them to reclaim VAT in cities such as Paris—something they cannot do in the UK.
As a result, British shoppers claimed £742 million in VAT rebates from the EU in 2024, more than five times the sum from 2021, with France receiving over a third of this total. Projections suggest this amount could surpass £1 billion by 2026, representing £5 billion in sales. A measure designed to benefit the Exchequer has inadvertently begun to support France’s economy instead.
Brian Duffy, CEO of Watches of Switzerland Group, indicated in 2024 that the UK government should seriously reconsider reinstating the VAT rebate scheme. He noted, “We are aware from our brand partners and published data that tourist spending is bouncing back in the EU in a way that is simply not happening in the UK, and this is all down to the absence of VAT-free shopping.”
This situation has become even more complicated due to the ongoing conflict in the Gulf region, which has diminished visitor numbers from that area while directing their spending power towards Europe.
Historically, Gulf visitors have splurged an average of around €24,000 during a trip to Europe, with Britain typically being their preferred destination. However, many are now opting for countries that continue offering VAT refunds.
Factors influencing this shift extend beyond price; tourists take into account ticket costs, taxes, and currency conversion when planning their spending. While the UK maintains control over the middle element—taxation—the fixed exchange rates can unfavourably affect how far visitors’ currencies stretch.
As of 2026, the pound’s stability against the euro and the rising dollar have made the UK less appealing, especially before taxes are factored in. The lack of VAT reimbursement and currency strength work in tandem against British retailers, and only the former is within the government’s control.
The economic impact goes beyond direct sales; a shopper purchasing a luxury item often contributes to hotel bookings, restaurant patronage, and entertainment expenses, meaning that lost sales translate into broader economic consequences.
Research by the Heart of London Business Alliance estimates that UK high streets could suffer a loss of around £1 billion by 2025. The retail sector estimates that £2 billion in potential tourist spending departed the UK in 2024. Iconic retailers such as Harrods reported a pre-tax loss attributed to reduced tourist activity and the absence of duty-free incentives.
Selfridges experienced a 7% decline in annual sales for the 2025 financial year, marking its fifth consecutive year of losses. Management cited the discontinuation of tax-free shopping as a significant factor in the decline of luxury goods purchases among international visitors.
The UK Treasury contends that reintroducing a VAT refund scheme could result in a loss of £2 billion annually in uncollected VAT, benefiting mainly London. However, this figure only accounts for refunds issued and fails to consider the potential influx of spending.
Oxford Economics presents a different perspective, suggesting the actual costs are significantly lower and highlight potential gains of over 78,000 jobs and £4 billion in GDP. The retail sector believes that a scheme available to all tourists, regardless of EU status, could attract approximately £5.65 billion in additional spending yearly.
The current policy’s shortcomings are evident, particularly as Britain’s Tourist Tax continues to constrain profits for leading retailers, which in turn affects corporate tax revenues. Since 2022, luxury brands have seen a decrease in combined profits, largely due to reduced tourist spending and the flight of British consumers to European markets.
Antoine Pin, CEO of TAG Heuer, disclosed that the luxury watchmaker observed a drop in international tourist traffic and purchases in the UK compared to 2019, with many choosing to buy their goods abroad after comparing prices while in-store.
While the UK need not subsidise foreign economies, it must reconsider its approach to tax policy that seemingly hinders its competitiveness at a time when high-end shoppers are evaluating their travel options.
The decision facing visitors—whether to return to the UK or bypass it—hinges on strategic policy choices now more than ever.
