Think Tank: Scrapped Tax-Free Shopping Scheme Would Contribute £11.1 Billion to Economy

Crowds of shoppers are seen on Oxford Street in London on Dec. 2, 2020. Peter Summers/Getty Images

The UK economy could have recorded a higher GDP last year, had the government not scrapped the tax-free shopping scheme for international visitors, a think tank has reported.

A fully operational VAT retail export scheme would have attracted two more million visitors, who would spend up to £4 billion more, analysis by the Centre for Economics and Business Research (CEBR) revealed.

In terms of the GDP impact, it would contribute £11.1 billion to the economy, up from the previous estimate of £10.7 billion, CEBR said.

Under the VAT Retail Export Scheme, tourists could claim back tax on items they purchased but didn’t consume in the UK. The days of tax-free shopping for visitors to England, Scotland and Wales came to an end on Dec. 31, 2020, when the VAT refund scheme was discontinued by the government.

In Northern Ireland, the scheme remains operational.

While the government, led by the then Prime Minister Boris Johnson, believed that the scheme was costly to the UK economy, retail sector leaders criticised the decision to end it.

Offering tax-free shopping to tourists “incentivised” spending and contributed to the tourism sector overall, the heads of the industry said.

Analysis of the 2023 Q3 by the CEBR showed that an operational VAT scheme would bring visitor numbers closer to pre-pandemic levels.

Tourists would have spent an estimated £1.3 billion higher in the third quarter than the £10.1 billion figure reported by the Office of National Statistics (ONS).

“Our analysis suggests that the operation of a tax-free shopping scheme would have helped to close this gap, by encouraging greater visitor numbers and expenditure and producing impacts down the retail supply chain,” said CEBR managing economist Sam Miley.

Mr. Miley suggested that the boost to public finances should be of interest to policymakers ahead of the upcoming Spring Budget.

Calls for Reversal

Last year, British MPs urged the government to reconsider their objection to tax-free shopping.

“There is a common perception that tax-free shopping affects only Oxford Street, Bond Street and the west end; however, this issue affects the whole United Kingdom,” said Conservative MP, Sir Geoffrey Clifton-Brown.

He noted that spending outside of London was significant for local economies, including Edinburgh, Manchester, Liverpool, Glasgow and Leeds.

Lawmakers have also called for an independent review assessment on the full impact of tax-free shopping on the UK economy and its tax revenues.

This comes amid concerns that the government was basing its decisions on the “inaccurate” Treasury figures that estimated the cost of tax-free shopping at £2 billion a year in refunded VAT.

During a parliamentary debate last September, the then-secretary to the Treasury, Victoria Atkins, defended the government’s cost estimates.

The cost of the scheme, calculated by the Treasury, takes into account changes in behaviour, adjustments in the number of visitors and the impact of digitalising the scheme, Ms. Atkins said.

She argued that tax-free shopping was still available for all non-UK visitors who purchase items in-store and have them delivered to their overseas address. It also applies to items bought online and delivered to shoppers overseas.

The government is committed to supporting the retail sector, but the chancellor’s priority was “being responsible with the public finances,” Ms. Atkins told the MPs.

Business leaders have called on the Chancellor Jeremy Hunt to restore tax-free shopping.

In a letter signed by heads of the Heathrow Airport and the Association of International Retail, among others, signatories said that 10 percent of UK spending by international visitors in 2019 has now relocated to EU countries.

Tax-free shopping will boost visitor spending ahead of the Paris Olympics in the summer, the business leaders said.

Apart from retail, the letter added that the tax-free shopping scheme will boost spending in hotels, restaurants, museums, and theatres.

During the Autumn Statement, Mr. Hunt said that the VAT-free shopping scheme was changed because “we did not think we could afford to continue it.”

The chancellor vowed to “look at the numbers again,” following calls for the reinstatement of the policy.