One initially overlooked aspect of Liz Truss and Kwasi Kwarteng’s ill-fated mini-Budget was the plan to restore VAT-free shopping for tourists. The scheme, which allowed non-EU visitors to claim back 20 per cent on their purchases, was scrapped in 2020 by then chancellor Rishi Sunak but looked set for a comeback. This was excellent news where I live – Japan – and throughout Asia, where holidays are short and shopping plays a big part in overseas trips. But just as tourists were writing up their lists and planning their itineraries, Jeremy Hunt pulled the rug from under their feet by cancelling the uncancelling before it had even reached Kwarteng’s promised consultation phase.
Was he right to do so? Almost certainly not. When the scheme was first ended it was claimed by the Treasury that this would save £1 billion a year, and the claim this time is £2 billion. But these figures seem to be based solely on the reclamation of the lost tax revenue from tourists whom, it was assumed, would still visit. It doesn’t appear to consider the ‘halo effect’ of the spending on hotels and restaurants and so on lost to the economy if a proportion of those high-end tourists, who have been calculated to spend 14 times as much as mass tourists, holiday elsewhere – such as the rest of Europe, where tax-free shopping remains.
There is no shortage of data to support this hypothesis. A report by the business association for luxury brands, Walpole, quoted a survey conducted by the tax-free shopping business Global Blue in 2019 which reported that 93 per cent of international travellers said they would be less likely to shop in the UK if they couldn’t reclaim VAT. Similarly, a VisitBritain Traveller Sentiment Survey in March last year found 27 per cent of Saudi Arabian and UAE respondents said they would go elsewhere without tax-free shopping.
Even the government’s own data undermines the wisdom of the decision: an HMRC survey from May 2020 found that 69 per cent of respondents said the possibility of tax-free shopping influenced their decision to come to the UK. And the Office for Budget Responsibility has estimated the decision to abandon the tax refund scheme will precipitate a drop of 38 per cent in retail sales to non-EU visitors compared with 2019.
Consider Wedgwood in Staffordshire, whose Barlaston factory is served by local craftsmen and women and which relies on the custom of particularly Asian tourists – now thin on the ground
There is plenty of evidence that these forecasts are broadly accurate. According to Global Blue, while US spend in the EU has returned to 91 per cent of what it was in Q4 2019, the figure for the UK is just 49 per cent. Walpole also notes a ‘sudden absence’ of visitors from the Gulf countries who shopped ‘almost exclusively in the UK on their European trips, spending an average of €24,000 each’. Burberry’s finance director has claimed London is losing out to Paris and Milan, and Mulberry is apparently questioning the viability of its flagship Bond Street store due to a loss of tourist footfall blamed by boss Thierry Andretta directly on the VAT scheme cancellation.
More devastating yet is the recent Oxford Economics research study that concluded that the government’s arithmetic was way off. Oxford found that rather than costing £2 billion a year to administer, the new tax refund scheme (which could have been offered to EU residents as well) would have netted a £340 million annual gain to the exchequer. And is if that weren’t enough, it estimated that 1.8 million extra visitors could be expected in 2025/26, generating £2.8 billion of extra spending and sustaining 78,000 jobs if the scheme were reinstated.
Why on earth then was the decision to cancel the scheme taken? There are only two possibilities. Either the politicians and Treasury wonks involved simply didn’t do their homework and got their sums wrong; or, more likely, it was short-term optics rather than long-term economic reality, in a time of fiscal panic, that was the real motivation.
On the face of it the losers, rich tourists and luxury goods retailers, are not the most important targets when the government is seeking to present itself as prioritising the poorest in society in difficult times. Offering tax breaks for American Express Gold card-wielding visitors to assist the London-based luxury goods sector while everyone else was getting hammered would have been a terrible look.
And yet the irony is that it will be ordinary people who get hammered, and not just in London. If luxury goods manufacturers such as bespoke tailors, many of whom are already struggling after two years of intermittent lockdowns, are forced to close or cut back, the small army of artisans scattered across the UK that supply them will be left without regular work.
Consider Wedgwood in Staffordshire, whose Barlaston factory is served by local craftsmen and women and which relies on the custom of particularly Asian tourists – now thin on the ground according to its owner Christian Bachler. Or there is shirt-maker Emma Willis, who employs mainly young women, including Syrian refugees, as cutters in her factory in Gloucester and gives a proportion of her profits to military charities. And there are many mills and independent craftsmen located in the north of England and Scotland supplying the London boutiques. So much for levelling up.
The tax-free shopping scheme worked. The Treasury, the retailers and their workforce, their suppliers and the wider tourism ecosystem all benefitted. As of course did the tourists. And now they won’t. Come back Liz and Kwasi, all is forgiven.
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