Story Highlight
– Boris Johnson’s government ended VAT rebates for tourists.
– Tax impact varies between official reports and retail studies.
– Restoring VAT-free shopping could boost jobs and GDP significantly.
– Conservative leader proposes to abolish the Tourist Tax.
– Retail sector claims VAT-free shopping benefits the entire economy.
Full Story
The Conservative government, led by Boris Johnson, eliminated instant VAT rebates for international visitors as part of the Brexit negotiations formalised in January 2021. The ramifications of this decision, often referred to as the “Tourist Tax,” have sparked considerable debate.
According to the Office for Budget Responsibility (OBR), the repeal of VAT-free shopping is projected to contribute approximately £540 million annually to government revenue, factoring in the decline in foreign visitors and their spending. However, research commissioned by the retail sector presents a contrasting perspective, suggesting that the losses in tourism, retail sales, and job opportunities far outweigh any gains from VAT.
Oxford Economics reported in 2023 that reinstating VAT-free shopping could create around 78,000 jobs and increase the UK’s GDP by £4.1 billion. Similarly, retail consultancy CEBR estimated that reversing the prohibition could attract an additional 2 million visitors each year, generating £10.7 billion in spending and £2.3 billion in taxes for the Treasury.
Despite ongoing campaigns from retailers and backing from various media outlets, including the Daily Mail, successive chancellors have resisted moves to revert the policy.
This week, Conservative leader Kemi Badenoch visited Bicester Village to express her intent to abolish the Tourist Tax in the event of a successful election. “When tourists choose where to shop, the tax rate matters,” she stated.
Restoring VAT-free shopping poses political challenges, with opposition parties likely to criticise the initiative as favouring wealthy foreign shoppers over local citizens. Badenoch attempted to address these concerns through social media, stating, “This isn’t just about somebody buying a handbag on Bond Street.”
She elaborated on the broader economic impact, detailing how such spending supports a variety of local jobs, from hotel staff to restaurant employees. “If they can save 20% by buying in Paris or Milan instead of London, many of them will,” she argued.
Proponents of restoring the VAT exemption, particularly from the luxury retail sector, have lent their support to Badenoch’s position. Simon Walton, managing director of Berry’s Jewellers, remarked, “As a luxury goods retailer, it seems ridiculous that we are the only country in Europe with no tax-free shopping.” He added that reinstituting the VAT exemption could aid in combating youth unemployment and reviving struggling high streets.
Charlie Pragnell, managing director of Pragnell, described the government’s stance as detrimental. “For the UK government to actively put our own economy at a competitive disadvantage to Europe since 2021 has been a great mistake,” he stated, highlighting the significant benefits that VAT-free shopping brings to the retail and hospitality sectors in the UK.
Analysis of financial data from the UK’s leading luxury jewellers reveals a significant downturn in operating profits following the implementation of the Tourist Tax. Chisholm Hunter reported a staggering 60% decline in operating profit from 2021 to 2024, while Beaverbrooks saw its profits decrease from £35 million to £7 million over the same timeframe. Together, the top 11 luxury jewellers experienced a drop in annual operating profit from £180 million to £155 million between 2022 and 2024.
Pragnell further emphasized that the negative effects of removing VAT-free shopping extend beyond the retail sector. “We can estimate how much retail and hospitality revenue we have lost. However, we don’t know the level of foreign direct investment that wasn’t made by visitors during this time,” he remarked, suggesting that the economic advantages of affluent visitors in the UK are currently underestimated.
In its 2024 report, the OBR noted that approximately 1.2 million visitors claimed VAT refunds in 2019—the final comprehensive year before the policy change—receiving over £520 million in refunds, with an average of £2,700 per claimant. The OBR posited that keeping the VAT that would have been refunded could yield a gross benefit of around £685 million by 2025-26.
The OBR also considered behavioural responses from tourists, estimating that the UK sees about 34,000 fewer visitors annually due to the tax, resulting in a loss of approximately £15 million in tax revenue. Additionally, the lack of VAT relief has led to a further £24 million in lost potential taxes from hotels and restaurants due to absent tourists. The agency calculated that ongoing visitors are spending less on VAT-exempt goods, costing the Treasury about £102 million in revenue.
In summary, the OBR concluded that the net gain from retaining the Tourist Tax for the Treasury stands at £540 million annually. However, Pragnell maintains that policymakers are poorly equipped to evaluate the policy’s true impact on the economy. “The reintroduction of VAT-free shopping for tourists with the new addition of 240 million European customers would be a greater boost for our country than can be calculated by career civil servants,” he asserted, expressing optimism about the potential for future growth should the policy be revised.
