The Case for Reinstating Tax-Free Shopping: Why the UK Tourism Industry Deserves a Break
It’s becoming increasingly clear that the UK’s travel and tourism industry is still tackling the fallout from decisions made by the previous government. The abolition of tax-free shopping for international visitors has left many in the sector feeling short-changed, and it’s high time we address this issue.
The removal of the VAT retail export scheme (RES) in January 2021 was part of a broader overhaul of the UK’s tax system as the Brexit transition concluded. At the time, the Office of Budget Responsibility (OBR) estimated that the scheme cost the government £500 million in VAT refunds in 2019. The expectation was that scrapping it would bring in an additional £685 million by 2026, with potential savings reaching as much as £1.8 billion when administrative costs were factored in.
However, these figures have been contested by the travel and tourism industry from the start. Industry leaders argue that the real impact of the RES abolition is a net loss to the economy. They claim that it has dampened tourist spending and even reduced visitor numbers, as tourists are now favouring destinations where tax-free shopping is still available.
The term ‘tourist tax’ was quickly coined as the return of VAT on goods purchased by overseas visitors sparked widespread calls for its removal. Trade bodies have suggested that the resulting drop in spending by international visitors could lead to a £5.6 billion hit on retail revenues, while the potential loss of tourists to other destinations might cost the UK a staggering £10 billion.
Understanding Tax-Free Shopping
It’s important to clarify what tax-free shopping entails. Unlike duty-free shopping, which is common in the ‘free zones’ of international airports, tax-free shopping refers to the removal of VAT or other consumer taxes on goods purchased for use in another country. The principle here is to avoid double taxation—taxing goods when they are brought into a country but not when they leave.
Tax-free shopping serves as a valuable perk for non-residents and tourists. It’s not just limited to airports and ports but applies to all goods included in the scheme, wherever they are purchased, as long as they are taken home for consumption. The UK’s RES allowed consumers to claim back the tax paid on these goods at the point of departure—a process that, while criticised for causing airport queues, was highly valued by tourists.
Why the Travel Industry Wants RES Back
The OBR’s impact assessment suggested that the RES mainly affected goods purchased at luxury retail outlets in central London and designer retail parks. Yet, it also acknowledged that VAT was refunded to 1.2 million visitors in 2019—a significant number of high-spending tourists.
The tourism industry has fiercely contested the OBR’s assessment, particularly its claim that only 30,000 tourists per year might be deterred from visiting the UK due to the scheme’s abolition. Research from the Centre for Economics and Business Research (CEBR) suggests that the real impact is far more severe, with an estimated 500,000 visitors lost in just three months following the RES removal.
Critics also point out that the initial impact assessment failed to consider the multiplier effects of retail spending and the broader impact on the UK’s reputation in the global tourism market. High-income tourists, who are the biggest beneficiaries of tax-free shopping, are known for being value-conscious and will choose their travel destinations based on where they can get the best value.
Currently, 63 countries worldwide, including all 27 EU members, offer tax-free shopping to tourists. By scrapping the RES, the UK has lost ground in a lucrative tourist market to some of its closest rivals. Evidence for this is mounting—Global Blue, a tax refund platform, reported that 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 shifting to EU destinations. Even luxury department store Selfridge’s cited the abolition of RES as a factor in their decision to announce job cuts in May, while Heathrow Airport has also pointed to the absence of tax-free shopping as one of the challenges facing the UK as a global aviation hub.
Looking Ahead
As Chancellor of the Exchequer Rachel Reeves prepares for her first Autumn Statement, she faces a deluge of lobbying from industries eager to see tax-free shopping reinstated. The tourism and retail sectors are calling for a path forward that supports a brighter future for the UK economy. Restoring tax-free shopping could be a crucial step in that direction, ensuring the UK remains competitive in the global tourism market and continues to attract high-spending visitors.
The clamour for change is growing louder, and by the time the Autumn Statement rolls around, it’s likely to reach a fever pitch. Reinstating tax-free shopping isn’t just about giving international visitors a break—it’s about giving the UK’s economy a fighting chance.