The VAT-free shopping debacle has sent tourists packing

Five years after the end of the VAT policy, retail and hospitality sector leaders say the impact is still painful as the industry seeks change, writes Joanna Hodgson

Five years ago this month, a change occurred that might, on the surface, have prompted the average British shopper to break out their tiniest violin: overseas visitors would have less incentive to buy branded goods in the UK.

Once a hugely popular amenity, the ability for non-EU visitors to reclaim 20 percent VAT on purchases ended under the Conservative government in January 2021 after the UK left the bloc. Since then, a growing number of CEOs from high-end retail and hospitality companies have raised concerns over the significance of the decision to remove VAT-free shopping.

Paul Barnes, who chairs industry body the Association of International Retail (AIR) said the return of duty-free shopping would provide a major boost to the UK economy. “This is one of the most important issues for tourism and roads in the UK.”

Now, after half a decade has passed and there is no reprieve for the many companies calling for the reintroduction of tax-free shopping, Barnes is making a new appeal to the government for a review. At the same time, a number of current bosses told City AM that the impact of the so-called ‘tourist tax’ is still very visible, adding another challenge for 2026.

Regarding the disadvantages and advantages of VAT-free shopping, estimates vary. The government at the time previously stated that the scheme could cost British taxpayers £2 billion a year and that it would primarily benefit London. But many companies argue that the decision to stop VAT-free shopping is unwise, and this has driven wealthy consumers to resort to shopping therapy in other countries.

Helen Brocklebank, chief executive of luxury goods trade body Walpole, said a reversal of previous government policy “could contribute billions to UK PLCs and the nation’s finances by bringing our cities back on par with our European neighbours”.

AIR last year estimated the UK would lose around £2 billion in tourist spend in 2024 alone as non-EU international visitors shift their money to France, Italy and Spain.

AIR has reiterated its request, in its new letter to the Chancellor after the Budget and before Christmas, for the government to make a commitment in the forthcoming National Visitor Economic Strategy to review the impact of tax-free spending on the economy and finances. The focus is on the potential that could be generated from the new scheme, one that is open to all international tourists, including those from the EU, based on all the new evidence on the actual impact on spending over the last five years.

The association previously estimated the new scheme would generate at least £5.65 billion of additional overseas spending each year.

The new initiative could help build momentum after a tumultuous few years in the retail and hospitality sectors. Visitor numbers have slumped during the pandemic, while costs have soared including a rise in National Insurance contributions last year. Higher costs from April include the National Living Wage, while business rates remain challenging.

Some luxury goods companies have reported that they are encouraging trade, but brands insist that the lack of duty-free shopping is hampering the level of growth that could be achieved.

Sean Dixon, co-founder of Mayfair-based suit maker Richard James, said: “Our Christmas trade was flat compared to the previous year and better than we expected. We were told by existing clients that when they come to Europe, they tend to skip London to shop and save money in other European cities.”

Brian Duffy, CEO of Watches of Switzerland Group said: “While the majority of our UK business is driven by domestic demand, we are seeing clear evidence that international visitors are choosing to do their Christmas shopping in European cities rather than London, Manchester or Edinburgh.”

Duffy believes that reintroducing VAT-free shopping is a win-win solution. “This is a golden opportunity for the government, a way to spur economic growth while supporting business in the UK.”

Luxury hotel tycoon Sir Rocco Forte echoed that sentiment, saying that since the removal of tax-free purchases for tourists in 2021, “the UK has become the only major country in Europe not to offer VAT refunds to international visitors.”

Even for companies that have a large customer base in the UK and are less exposed to fewer international visitors, the ‘tourist tax’ feels like a barrier to the development of the wider sector. Michael Wainwright, chairman of Boodles, said he was pleased with the jeweller’s performance at Christmas, but “certainly if we had VAT-free shopping it would probably be even better”.

Ros Morgan, chief executive of the Heart of London Business Alliance said: “The UK’s high streets are facing increasing pressure from soaring business rates, employment costs and losses of £1bn by 2025 as shoppers take advantage of duty-free shopping in the EU. The fix is ​​simple: restore the VAT cuts offered to tourists for decades in the UK – a benefit that is still available to international visitors, including British citizens, in every one of our European rival countries.”

An HM Treasury spokesperson said visitors can still claim VAT relief if the goods purchased are sent directly to their country of origin as an export.

The spokesperson added: “The UK is one of the most visited countries in the world with international tourism driving billions of dollars into our economy. We support the continued growth of the industry, and the Government is working to meet our ambition to welcome 50 million international visitors annually to the UK by 2030.”

Many companies believe that the government’s change to VAT-free shopping patterns could help Whitehall fulfill those ambitions.