Analysts question government U-turn on VAT-free shopping for tourists

19-10-22

Industry bodies are continuing to criticise the UK government’s decision to abandon its planned revival of tax-free shopping for tourists. And while that’s hardly surprising, analysts seem to be on their side suggesting the strategy change makes no sense. They said that there are already clear signs of how the abolition has already hurt the UK.

In an analyst note, investment bank Jefferies said: “We are back to square one: the UK will continue to no longer offer tax refunds on local spend to overseas visitors, thereby putting London at a distinct disadvantage vs Paris or Milan.

“Maintaining the status quo will just continue to penalise London, with anecdotal evidence of some luxury brands making products available elsewhere in Europe for some of their wealthier, mobile customers. A study by Walpole/Bain flagged that wealthy visitors have a propensity to spend 14x mainstream tourists, and this would be an obvious driver for the luxury sector in the UK. Given current political uncertainty, it is difficult to say whether this reversal of the reversal could be reversed, be it next week or next year.”

And it added that its channel checks had shown Bond Street retailers had always assumed that the abolition of VAT-free shopping had only been temporary and a decision to bring it back was inevitable.

Jefferies’ analysts said that the abolition was “an odd stance to take post-Brexit and at a time when retail recovery in the UK was far from assured. Its implementation on January 1, 2021, was a somewhat controversial decision and often mentioned by luxury brands as one that would impact London's status versus the likes of Milan or Paris, let alone Dubai, etc. Our London channel checks highlight that this was having an impact this summer, with sales to US visitors less buoyant than those in other European cities”.

The investment bank said it’s also watching for “any possible reversal of the reversal of the reversal”.

Meanwhile, Head of Consumer Research at ParcelHero, David Jinks, said he understands that “restoring market stability amid soaring government borrowing and interest rates was vital” after former Chancellor Kwasi Kwarteng’s mini-budget caused market chaos. With both the pound and stock markets initially climbing after the U-turn, “that may ease the immediate pressure on retailers and UK manufacturing”.

But he added that “Chancellor Hunt’s emergency statement has a dark side for businesses; it’s very much a two-edged sword.”

He said that “abandoning plans to scrap VAT paid by foreign visitors in UK stores will not please many retailers. They were eagerly anticipating a spending spree from wealthy US and Middle Eastern shoppers. The Association of International Retail (AIR) says the original scrapping of tax-free shopping back in 2019 cost 20,000 jobs and lost a significant amount of the £28.4 billion foreign visitors spent in the UK annually. Retailers and their logistics partners have seen a great opportunity for renewed growth snatched away from them”.

With a few minutes of the announcement, AIR’s head Paul Barnes had called it a short-sighted move based on inaccurate and incomplete projections… a hammer blow to UK tourism and the British high street.”

Helen Brocklebank, CEO of UK luxury body Walpole, said the group is “disappointed” that the government has axed a policy that would “quickly deliver growth”. Walpole had expected a direct retail sales boost worth £1.2 billion for the VAT-free shopping return.

And while the original decision to axe the perk nearly two years ago was claimed to be about bringing the UK in line with the rest of the world, the British Retail Consortium pointed out on Monday that the latest decision “leaves the UK as one of the only European countries not to provide a tax-free shopping scheme to encourage tourism.”