Britain pays the price for ignoring luxury
Will the UK government ever bring back tax-free shopping for visiting tourists?
The UK's Labour Party has been locked in a fight over welfare cuts this week, with backbench MPs threatening a rebellion over cuts to disability benefits. For years, another fiscal argument has been simmering: whether to restore tax‑free shopping for tourists, a policy abolished by the Treasury in January 2021.
The optics are politically challenging. Offering a 20 per cent VAT refund on a Cartier handbag while reducing disability payments is a tough sell for any government. But the economics, and the politics, are far less straightforward.
Anda Rowland, director of Savile Row tailor Anderson & Sheppard describes what she says is now a common occurrence on London’s Bond Street, the home of luxury shopping in the UK capital. “Customers come in, go through everything, choose all sorts of things, and then say, ‘Oh, can you ring up the shop in Paris and put these aside?’” This scene, which she says plays out daily across London's luxury retail destinations, encapsulates one of the most consequential yet underappreciated policy decisions of recent years: Britain's withdrawal from tax-free shopping for international visitors.
The policy has had a big impact on her industry, says Rowland. “When people come and visit Europe, they want all things European lifestyle. They want to go out in England and have a pint wearing a blazer. They want to go out in Italy and have a cappuccino wearing a pink linen shirt. That's part of the fun of travelling”. Before the tax-free scheme was scrapped, she says, “a Middle Eastern or American customer would come to London, they’d order a blazer, have some fittings and pick it up in May and go and enjoy themselves wearing it all through the summer”. Apparently, those customers are now taking their wallets – and their summer stories – across the Channel.
Under the old VAT Retail Export Scheme, non‑UK residents could reclaim the 20 per cent sales tax on goods they bought and took home. The programme was scrapped after Brexit rather than extended to EU visitors, partly because Treasury officials judged it too London‑centric and costly. The government says ending tax-free shopping is saving the taxpayer about £400 million a year. The industry said it is pushing high‑spending tourists straight to Paris and Milan.
James Chapman, a former Treasury special adviser and political editor at the Daily Mail, and one of the leaders of the campaign to bring back tax-free shopping, says the decision was a self‑inflicted wound. “This [was] a clear Brexit benefit. We can offer this to a market of 450 million EU consumers who would be in the only place they could tax-free shop in Europe”, he said. Chapman has assembled hundreds of companies including Harrods, Burberry and Fortnum & Mason in a campaign to bring the scheme back. That all led to a Daily Mail front-page in 2023 shouting, “Time to Scrap the Tourist Tax”. The campaign hasn’t worked, and it’s unlikely a Labour government is going to take on the risk of bringing it back after the third major U-turn in a month.
Rishi ruled out a return
Ironically, the Conservative politician and then-Chancellor Rishi Sunak, and a man not averse to a bit of luxury himself, is the person who killed this tax perk, and who resisted bringing it back when he became prime minister.