UK's VAT-free shopping for tourists axed again as mini-budget unravels

By

Sandra Halliday

Published
Oct 17, 2022

In a massive blow to the retail sector, the UK's new Chancellor, Jeremy Hunt, has undone one of the most significant measures for retail of the now-notorious mini budget that had been unveiled in September.

The much-called-for revival of VAT-free shopping for international tourists will not now go ahead. 

The New West End Company had said only 10 days ago that the West End of London was on track to get back to historic spend levels by 2025 and the VAT-free move was a key part of this. 

The news on Monday could mean a delay to the recovery not only of the west End but other key tourist shopping areas across the UK.

Paul Barnes, Chief Executive of the Association of International Retail, said the decision to reverse the plans would be "a hammer blow to UK tourism and the British high street. This short-sighted move is based on inaccurate and incomplete projections, and risks putting a brake on the return of international visitors who are vital drivers of economic growth throughout the UK. 

“We urge the Chancellor to pause, reflect and commit to a full cost-benefit assessment before deciding on the future of tax-free shopping, which we know is a key motivator for international tourists when choosing where to visit. Ministers must base their decision on the full picture, including the significant economic benefit that international visitors bring to the UK, which this decision puts at risk.”

The VAT-free perk was all-but-abolished almost two years ago as the UK sought to fund the huge amounts of money it had paid out in Covid support by clawing back tax revenues. This meant the ability for international shoppers from outside of the EU to claim back at the airport the 20% VAT paid on their purchases was done away with.

The mini-budget under previous Chancellor Kwasi Kwarteng flagged a return of the perk, while its many other unfunded tax cuts precipitated a crisis for the UK that saw the pound plunging, borrowing costs rising, as well as one of the shortest Chancellorships of all time. Prime minister Liz Truss sacked him last week, despite having enthusiastically supported the measures he brought in.

She appointed Jeremy Hunt as Chancellor in recent days and he’s reversed almost all of the measures that were to be introduced, preferring to focus on getting the economy on a healthier footing.

However, as Paul Barnes highlighted, many believe that cancelling the VAT-free shopping perk will be a spectacular ‘own goal’ given that VAT-free shopping in other key European cities, such as Paris and Milan, is a huge draw for high-spending international tourists.

Had it been reintroduced as planned, Britain would have had an even bigger advantage as it's now outside of the EU so visitors from nearby Europe would also have been able to claim back the VAT on their purchases. While this would have dented overall VAT revenues, the thinking in the retail sector is that the massive number of tourists who would visit Britain purely for shopping would have more than made up for this.

As well as buying luxury goods they'd have been staying in hotels, eating at restaurants, visiting galleries, cinemas and other attractions, and generally boosting the UK economy and creating jobs.

Perhaps the Chancellor is hoping that the fall in the value of the pound would mean tourists will still flock to the UK and spend heavily while there. However, the overall reversal of the mini-budget has actually boosted the pound’s value so that advantage is now less pronounced.