Tax-free shopping could add at least £350m to UK government coffers - report

By

Sandra Halliday

Published
Nov 17, 2022

The debate around tax-free shopping’s value to the UK economy continues with the Government still set against it, but a new report suggesting the politicians are making a huge mistake.

A new Oxford Economics’ report, commissioned by the Association of International Retail (AIR), trashes the Treasury’s estimate of a £2 billion annual cost to reintroduce tax-free shopping in the UK.

The report claims the Treasury would benefit by £350 million each year if tax-free shopping returned and the wide boost in foreign visitor numbers and spending across the country would add up to billions of pounds annually. This would support tens of thousands jobs across the UK.

AIR now wants the Chancellor to request that the Office of Budget Responsibility reviews the Treasury’s original estimates.

Tax-free shopping has been a major issue in the past few years. It was abolished in its original form at the start of last year as the Government sought to recover cash following the unprecedented support spending during the pandemic. 

The abolition has already hurt luxury retailers in the UK with reports that non-European tourist shoppers have been going to cities such as Paris and Milan to buy designer fashion, rather than London, Birmingham Edinburgh or any other UK destination. 

And plenty of potential spending has also been lost with the opportunity to expand tax-free shopping to EU residents post-Brexit also being abandoned.

There had been some hope a couple of months ago, when the disastrous mini-budget included one benefit — the return of tax-free shopping, and its expansion to European visitors. But the U-turn after the fallout from the budget saw it being abolished once again.

So how did the researchers arrive at the £350 million estimate of tax-free shopping’s benefit? Oxford Economics’ report estimates that the real direct cost to the Treasury of refunded VAT would be £590 million, less than a third of what the Treasury itself has estimated. But tax-free shopping is expected to generate additional economic activity worth £940 million in tax take, leaving that net positive impact to the Treasury of £350 million. 

The measure would also bring in an additional 1.6 million visitors in the first full year, spending an extra £2.1 billion. The total economic impact of the boost in foreign visitor numbers and spending across the country would be £4.1 bn annually, which would support 78,000 jobs across the UK. 

Because this additional spending is generated from international visitors, “this estimated impact on GDP and tax take will be significantly higher than from a policy that incentivises UK spending”, we’re told.

The projected difference from the Treasury’s own figures is “likely due to an assumption that the average value of refunds would be the same for both EU and non-EU visitors, an overestimate in the total value of tax-free shopping refunds that would be claimed, alongside a failure to include the tax-free shopping policy’s impact on visitor behaviour,” the report said.

AIR chief executive Paul Barnes said: “At a time when the economy is facing a major downturn, and businesses across the country are looking for any opportunity to boost their income, we have an additional 1.6 million affluent visitors ready and waiting to flock to our shores and spend money in our shops, restaurants, hotels and tourist attractions.” 

And it’s not only AIR claiming tax-free shopping would be a benefit. Sir Geoffrey Clifton-Brown MP, who’s Deputy Chair of the Public Accounts Committee, said: “The Chancellor has thrown away one of the few measures in the Growth Plan that had been widely welcomed – the reintroduction of tax-free shopping. Today’s research demonstrates that restoring the low-cost measure would deliver a significant and instant boost to our economy. I urge the Chancellor to reconsider tax-free shopping as he looks for future growth policies that improve our economic outlook.”