Is the UK worse off since removing VAT refunds?

Britain has become the “least attractive” shopping destination in Europe.

That’s according to Burberry Chief Gerry Murphy, who criticised UK Prime Minister Rishi Sunak for removing VAT refunds in 2021 when Sunak was serving as Chancellor.

Speaking at last month’s Business Connect conference, Murphy said the “somewhat perverse” decision has made the UK 20% more expensive for tourists.

He argues that retail brands are now “actively exporting business” and tourism operators are suffering as a result.

The removal of VAT refunds came shortly after Britain left the EU, arguably adding fuel to the fire at a critical juncture in Britain’s recent history.

“Leaving the EU has had a significant friction effect on trade,” said Murphy, describing Brexit as a ”drag on growth”.

In a bid to return to tax-free shopping for tourists, leading retailers and major tourist operators including British Airways, Rocco Forte and Fortnum & Mason have signed a petition pushing for the reinstatement of VAT refunds.

Industry bodies have been on board for some time.

British Retail Consortium chief executive Helen Dickinson welcomed the prospect of VAT-free shopping being reinstated as part of Kwasi Kwarteng’s mini budget in 2022.

“We welcome the reintroduction of tax-free shopping for tourists, which will boost sales and bring the UK back in line with other European nations,” Dickinson told The Guardian.

“Retailers are facing immense cost pressures, not just from energy bills, but also a weak pound, rising commodity prices, high transport costs, a tight labour market and the cumulative burden of government-imposed costs.”

UKHospitality chief executive Kate Nicholls, whose organisation represents restaurants, bars and hotels, would like to see broader VAT reform.

“While tax-free shopping for overseas customers is a welcome step to attract overseas tourists, a far more immediately impactful step would be to reduce VAT for our domestic customers,” she said. “Our VAT rate is the highest among modern economies, so if we want a globally competitive market, we need lower VAT and an equitable alternative to business rates.”

VAT refunds

20% VAT they had paid on VAT-inclusive purchases when leaving the UK.

The system, which was introduced in the UK in 1973, still applies in European nations including France, Spain, Italy and Germany.

In fact, Britain is now the only country in Europe without a tax-free shopping scheme for overseas visitors.

Critics of Sunak’s decision say this stark discrepancy between the UK and EU countries has placed Britain in an unenviable position when it comes to drawing overseas tourists. They argue visitors are taking their tourist dollars to other parts of Europe where they can benefit from tax-free shopping.

Examining the data

Data from international tax refund company Global Blue sheds light on the current state of play in the EU and UK retail sector.

By 2022, spending by US visitors to Britain had recovered from the pandemic and was sitting at 101% of 2019 levels. While this return to pre-pandemic levels is promising at face value, when examining data from nearby countries, it’s clear that Britain is lagging behind regional growth. Spending by US visitors to France reached 256% of 2019 levels, while Americans in Italy were splashing around 226% of their pre-pandemic spend.

Spending by tourists from Gulf States including Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE in the UK sat at 65% of 2019 levels. This was much lower than the 198% achieved in France and 166% in Italy.

Although US visitors make up the biggest proportion of shopping spending in Europe, 19.8%, tourists from Asia follow closely behind with 11.3% of the market.

Three years ago, almost 70% of Chinese consumers said they’d be more likely to visit the UK if a tax-free shopping scheme was available – reinstating VAT refunds could be a simple way to boost the appeal of the UK to a significant proportion of potential shoppers from Asia.

What’s next? Sunak, tight-lipped on the topic at Business Connect, has not given much away since.