The British government under new prime minister Liz Truss unveiled a raft of policies in a tax-cutting mini-budget on Friday. Key among them for the retail and luxury industries was the decision to reintroduce a tax-free shopping scheme for international visitors to the United Kingdom.
Under former chancellor Rishi Sunak—who lost out to Truss in the race to become leader of the ruling Conservative party earlier this month—VAT refunds were abolished almost two years ago making the U.K. the only country in Europe not to offer tax-free shopping to international visitors.
At the time, the U.K. treasury defended its position to remove tax-free sales at airports on the grounds that “the tax concession is not always passed on to consumers” and that, in some cases, tax-free goods were brought back into the country, putting domestic retailers at a disadvantage.
In the Growth Plan 2022, dubbed a mini-budget, new chancellor Kwasi Kwarteng responded to a hard-fought evdience-led campaign from a coalition of stakeholders including luxury group Walpole, the Association of International Retail, New West End Company, and others to reinstate both VAT refunds for tourists and airport tax-free shopping.
The government said that it will introduce “a modern, digital, VAT-free shopping scheme with the aim of providing a boost to the high street and creating jobs in the retail and tourism sectors.” A factor in the abolition of the old set-up was that it was unwieldy and partly manually based.
By modernizing the scheme through a new digital scheme, Kwarteng hopes to get it up and running “as soon as possible” though no timeline has been set. In a statement, the government said: “The new VAT-free shopping scheme for non-U.K. visitors to Great Britain will enable them to obtain a VAT refund on goods bought in the high street, airports and other departure points and exported from the UK in their personal baggage.”
“A great victory”
In a social media post, New West End Company, which represents a variety of businesses in London’s core shopping district, said: “The decision to reintroduce tax-free shopping for overseas visitors is a great victory. Now the West End can compete on a level playing field with Paris, Milan and Madrid as one of the world’s top shopping and leisure destinations.” For EU citizen’s, London—with its comprehensive high-end retail—will be among the nearest places to get 20% (the current VAT rate in Britain) off luxury and other brands, in addition to new duty-free allowances introduced since Brexit.
Helen Brocklebank the CEO of Walpole—representing luxury brands and retailers such as Alexander McQueen, Harrod’s, Burberry, Claridge’s, Farfetch, Harrods, and Rolls Royce—said: “I couldn’t be happier that the government has announced the return of tax-free shopping for visitors to the U.K. The £30 billion luxury tourism sector supports a wide ecosystem of manufacturers, retailers, cultural institutions, hotels and restaurants. This decision will ensure the future of many small businesses and create jobs.”
Walpole’s members include more than 250 of Britain’s top luxury brands, valued at £48 billion and collectively contributing 2.4% of the country’s GDP. According to New West End Company, in 2019 international visitors contributed over $29.6 billion (£28 billion) to the UK economy. “We are confident that we can exceed this figure in the years to come,” it said.
The mini-budget has also introduced 100% relief from business rates on newly occupied premises. On this reprieve, New West End Company’s interim CEO Dee Corsi told the London Evening Standard that this would usher in “exciting new brands” into central London.
When tax-free shopping will be reinstated is not clear. The treasury said that a consultation “will gather views” on the approach and design of the new refund system. Walpole’s Brocklebank said: “We will now work closely with the government to ensure that the scheme brings the maximum possible benefits, and that it is as simple as possible for tourists and businesses alike.”
While Kwarteng’s VAT refund plans have been welcomed by retailers, the colossal borrowing costs of his mini-budget sent the British pound tumbling against the dollar on Friday, with further falls at the weekend. The currency was languishing at an all-time low on Sunday night. For American tourists, the exchange rate will be enticing and could drive a travel boom to Britain.