August 16, 2023

The analysis of VAT refund schemes for international visitors has become somewhat of a specialty at Cebr in recent years. With over a dozen reports across various jurisdictions, Cebr has been a leading voice in evaluating the costs and benefits associated with such schemes. Furthermore, we were asked to provide expert evidence in the court of appeal against the decision to scrap the UK tax-free shopping scheme in 2021. Despite our analysis showing clear economic benefits associated with a VAT refund scheme and demonstrating the analytical errors in the Government’s calculations, the decision to terminate the scheme was upheld. The judges took the view that whether or not the original decision was right, it was not the role of the courts to overturn a political decision of this kind.

Two years later, we have revisited the figures to see how much economic activity and jobs the UK economy loses out on by not providing an incentive to international visitors which they are used to enjoying in many other countries across the globe, not least in the states of the European Union. When the UK was bound by EU law, tax-free shopping could only be offered to non-EU visitors. The potential economic benefits of the scheme are now even greater than was the case previously since the effective tax break could be offered to all international visitors without nationality restrictions. 

The report was launched at the beginning of this week as part of the ‘Scrap the Tourist Tax campaign’ which is backed by the representatives of 350 leading retailers and brands in the UK.

The below summarises the main findings of the report:

  • Centre for Economics and Business Research finds additional revenues generated by restoring scheme would outweigh losses associated with VAT refunds by £2.3 billion in 2023
  • 350 business leaders, including heads of BA, Marks & Spencer, Harvey Nichols, Primark, Jigsaw, Kurt Geiger, Heathrow, Gatwick, Burberry, and Mulberry sign open letter to Chancellor, calling move ‘a spectacular own goal’
  • MPs from all parties have joined calls for the ‘tourist tax’ to be scrapped
  • Campaign leader Sir Rocco Forte said Paris, Milan and Berlin ‘can’t believe their luck’

The Government’s controversial ‘tourist tax’ is costing the UK £10.7 billion in lost GDP and two million extra foreign visitors a year spending money across the economy, new economic analysis has concluded.

The Centre for Economics and Business Research (Cebr) found if the traditional scheme offering VAT-free shopping for tourists was restored, there would be a clear overall benefit to the public finances. For every £1 refunded in sales tax to foreign tourists, the exchequer would gain £1.56 in other taxes thanks to the dynamic economic effects of tourist expenditure.

The additional revenues generated would outweigh the losses associated with sales tax refunds by £2.3 billion in 2023, the report concluded.

The Treasury’s decision to scrap the traditional VAT rebate on shopping by foreign tourists has prompted a fierce backlash from business leaders and politicians from all parties, including two former Tory Chancellors, Liberal Democrat leader Sir Ed Davey and Labour Mayor of London Sadiq Khan.

So far, 350 businesspeople representing firms in hospitality, retail, luxury, travel, tourism and the arts have signed an open letter to the Chancellor organised by hotelier Sir Rocco Forte describing the move as a ‘spectacular own goal’ for the UK economy. Effectively, the decision has made the UK the most expensive place to shop in Europe, with every country remaining in the EU still offering sales tax rebates to foreign shoppers.

The signatories to the letter, including British Airways, Marks & Spencer, Harvey Nichols, Primark, Burberry, Heathrow, Gatwick, Victoria Beckham, the Royal Opera House, British Fashion Council, Fenwick, Charlotte Tilbury, UKinbound, Tate, The Really Useful Group, Shakespeare’s Globe, Southbank Centre and Bicester Village, have pointed to growing evidence that tourists are choosing to travel and spend in cities like Paris, Milan and Madrid rather than in the UK as a result.

They argue that the Treasury’s calculations on the cost of tax-free shopping take no account of the fact that tourists spend in hotels, restaurants, theatres, museums, tourist attractions and on public transport. Increasingly, UK shoppers are also choosing to spend overseas, with the VAT rebates they can claim covering the cost of travel.

The Cebr report concludes that spending eligible for tax-free shopping is estimated to have stood at £6.6 billion in 2022, rising to an estimated £7.7 billion in 2023. Assuming a 100% take-up rate of VAT rebates, £1.1 billion of this would have been returned to customers in the form of VAT refunds in 2022, rising to £1.3 billion in 2023.

On a per visitor basis, these VAT refunds would reduce the cost of a visit to the UK by approximately 4.2%. Based on the elasticity of demand for international travel with respect to price, this cost reduction would have increased visitor numbers by 1.7 million in 2022, rising to 2.0 million in 2023.

Assuming that additional visitors have the same per visitor spend as existing visitors, visitor consumption would have increased by £1.4 billion in 2022, increasing to £1.7 billion in 2023. Visitor spending patterns would also be impacted by the effective cost reduction. This would have produced further additional spending of £1.9 billion in 2022, rising to £2.2 billion for 2023.

The total increase in spending as a result of the scheme would have been £3.3 billion in 2022. This additional spending would have fed into higher output levels via the tourist spending multiplier, which estimates how the money spent by tourists circulates in the economy. This would have amounted to an increase in GDP of £9.1 billion in 2022, rising to £10.7 billion in 2023.

There would also be employment impacts. A fully utilised tax-free shopping scheme would have supported an estimated 172,000 jobs in 2022 or 201,000 in 2023. These estimates include existing jobs that would benefit from the reintroduction of tax-free shopping, as well as entirely ‘new’ jobs.

Taking into account the UK’s tax-to-GDP ratio, the increase to GDP would have increased tax revenues by £3.1 billion in 2022 or £3.6 billion in 2023. The reintroduction of a tax-free shopping scheme would have a net positive effect on government tax revenues. The additional revenues generated would outweigh the losses associated with sales tax refunds by £2.0 billion in 2022 or £2.3 billion in 2023, the report concluded.

Sir Rocco Forte, chairman of Rocco Forte Hotels, which helped to commission the new research, said: ‘The chorus of criticism from business leaders of the tourist tax has become deafening and a responsible Government can ignore it no longer. The Treasury has asked for evidence that scrapping tax-free shopping has damaged the economy and deterred high-spending tourists.

‘Not only have 350 leaders of some of Britain’s leading businesses and tourist attractions now signed a letter warning that valuable tourist revenue is being lost, we also have economic analysis showing very clearly that restoring tax-free shopping would boost the public finances and the wider economy.

‘Far from costing £2 billion a year as the Treasury has claimed, the exchequer would actually benefit by £2.3 billion when wider tourist spending is taken into account. At a time when we are desperate for economic growth, a U-turn on this policy is urgently required. We now know that reintroducing a VAT rebate scheme would boost visitor numbers to the UK by two million a year – the UK simply can’t afford to go on driving these tourists into the arms of our rivals.

‘As long as we leave the tourist tax in place, Paris, Milan and Berlin can’t believe their luck.’

Brian Duffy, CEO of the Watches of Switzerland group, which also helped to commission the report, said: ‘This evidence is even more compelling than I anticipated. It is simply irresponsible of the Government not to give this full consideration. We are aware from our brand partners and published data that tourist spending is bouncing back in the EU in a way that is simply not happening in the UK, and this is all down to the absence of VAT-free shopping.

‘Our economy needs sustainable growth and this report points to a significant growth opportunity from tourism.’

Sam Miley, managing economist at Cebr, said: ‘This report highlights the scale of the economic opportunity presented by the reintroduction of a tax-free shopping scheme. By making shopping purchases cheaper, tax-free shopping schemes act as an incentive for tourists to visit the UK over other countries. During their stay these tourists engage in other activity beyond their retail purchases, bringing a range of economic benefits that will be felt not only on the high street, but right through the retail supply chain.’

Source: Centre for Economics and Business Research (CEBR)
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