As the summer holiday season gets into full swing, sizeable sections of the UK’s travel and tourism industry claim the sector is being left short-changed by a fiscal hangover from the previous government.  

Calls for the reintroduction of tax-free shopping for international visitors began almost as soon as the UK phased out the tourist perk in January 2021. The abolition of the VAT retail export scheme (RES) formed part of a wider recalibration of the UK’s tax regime for the cross-border movement of goods as the Brexit transition period ended. 

According to an economic impact assessment by the Office of Budget Responsibility (OBR) at the time, the RES cost the Exchequer half a billion pounds in VAT refunds in 2019, and forecast the direct tax take from abolition would amount to £685 million by 2026. However, when taking into account the costs of administering the scheme, the potential saving for the public purse was put at $1.8bn. 

These figures have been vehemently disputed by the travel and tourism industry ever since. Industry chiefs have argued that the real impact is a net loss to the economy due to the dampening effect on tourist spending and even on visitor numbers, with tourists attracted instead to destinations where they can still get the benefits of tax-free shopping. 

The return of VAT on goods bought by overseas visitors was quickly dubbed the ‘tourist tax’ as the previous government faced widespread calls to scrap it. Trade bodies estimated that the drop in spending by overseas visitors would amount to a £5.6bn hit on retail revenues, while the loss of visitors to other destinations could potentially cost £10bn. 

What is tax-free shopping? 

Tax-free shopping schemes like the RES are different to the duty-free shopping travellers are used to finding in so-called ‘free zones’ at international airports and other ports of entry the world over. Free zones are a kind of no-man’s-land between tax regimes, which means goods sold are exempt from all forms of excise and duty, including VAT. 

Tax-free shopping, on the other hand, refers to the removal of VAT or other consumer taxes when goods are bought to be consumed/used in another country. This is based on the principle of giving primacy to the taxation of goods coming into a country, and avoiding ‘double taxation’ on the way out. 

In practice, tax-free shopping serves as a perk for non-residents/tourists. It isn’t restricted to goods bought in the free zones of airports and ports. It applies to all goods included in the scheme wherever they are purchased, as long as they are bought to be taken home for consumption. 

Tax-free schemes can either discount tax at the point of purchase (relying on the buyer producing a passport and short-term visa documentation, for example). Or, as in the case of the UK RES scheme, they can allow consumers to claim back the tax paid after purchase. With the RES, this happened at the point of departure. One of the criticisms of the scheme was that it exacerbated queues at airports.  

Why are tourist chiefs so keen to see RES return? 

The OBR’s impact assessment claimed that the RES only affected goods bought from a relatively small number of luxury retail outlets in central London and outlying designer retail parks. However, it also stated that, according to HMRC figures, VAT was refunded to 1.2 million visitors in 2019 – which adds up to a lot of luxury shoppers.  

The assessment also conceded that the scheme could deter 30,000 tourists a year from travelling to the UK. 

The scale of the deterrent and economic impact are hotly contested by the tourism industry. The Centre for Economics and Business Research (CEBR), for example, published research claiming that the scheme had cost the UK 500,000 visitors in just three months. 

Other arguments centre on the fact that the initial impact assessment didn’t consider the multiplier effects of retail spending, nor the effect it had on the UK’s reputation in a competitive global travel market. 

For example, the biggest beneficiaries of tax-free shopping are high-income tourists. Travel industry insiders note that, as well as being the highest spenders, this demographic are also very value-conscious and will purposefully choose destinations based on where they believe they can get the best value.  

63 countries worldwide currently offer tax-free shopping to tourists, including all 27 EU members and the majority of OECD countries. In other words, by scrapping the RES, the UK has ceded ground in a lucrative tourist market to some of its closest rivals, both geographically and economically. 

There is plenty of evidence to back this view up. For example, according to tax refund platform Global Blue, the recovery in post-pandemic tourist spending in EU countries in 2022 was double that of the UK, with 10% of pre-pandemic tourist spend in the UK relocated to EU destinations. Luxury department store Selfridge’s pointed the finger directly at the abolition of RES when announcing job cuts in May, while Heathrow Airport bosses have argued the absence of tax-free shopping is one of a number of factors affecting the UK’s position as a global aviation hub. 

New Chancellor of the Exchequer Rachel Reeves has a lot on her plate and a lot of lobbying from across industries to contend with as businesses look for a path to a brighter future. Come her first Autumn Statement, you can bet that the clamour to reinstate tax-free shopping will reach fever pitch.