The UK VAT Disaster
On December 31st 2020, tax free shopping will end in the UK. Britain will therefore be the only EU country not to offer tax free shopping. This is an impending disaster for the UK luxury system and UK retail more broadly, and makes absolutely zero sense in the current economic climate.
So why is this important? It doesn’t seem to be so at first glance, but let’s explore the abolition of tax free shopping numerically, and then the damage that this will do to the UK as a brand, and to the UK luxury and retail industry specifically.
What’s the story here? What is the background and impact?
In 2018, international tourists spent £22 billion in the UK and £6 billion was spent on shopping. £3.5 billion was registered as tax free sales although only VAT was only reclaimed on £2.5 billion. While international tourists reclaim VAT on £2.5 billion of purchases, they pay VAT on the rest of the £20 billion they spend, earning the Treasury around £4 billion annually.
Inbound tourism makes a vital contribution to the UK economy- earning £18 billion in foreign exchange for the UK each year. The “VAT Retail Export Scheme”-also known as Tax Free Shopping- plays a key part in the shopping experience and positively influences tourists to view Britain as a value for money shopping destination.
As of Dec 31st 2020, this tax free benefit will no longer exist for visitors to the UK. But why, you ask, would the government do such a thing?
This is due to the WTO. WTO regulations say the UK must offer tax-free shopping to EU visitors after December 2020. Under their guidelines you can’t treat countries differently.
To follow- EU visitors represent 70% of international visitors to the UK, and the current paper based HMRC validation systems cannot manage the extra volume of visitors. Essentially, because HMRC cannot digitize fast enough, the UK must drop the tax free scheme. Retailers have offered to install a validation element at no cost to the government (HMRC declined), and its failure to digitize the system has left no option but to withdraw the whole scheme- except for visitors who ship their goods home, which few if any will do.
Why is this a total disaster for UK luxury?
For several reasons, this is an extreme disaster for the UK luxury industry.
The first is lower overall international visitors and the knock on effect on retail goods and services spending as a result. Due to this change, 60% of non EU visitors say they will no longer visit the UK, and 93% of non-EU visitors say they will no longer shop in the UK. Due to COVID 19, West End spending is already down 80% ( down from £10 bn to forecast £2 bn ). The removal of the tax free scheme doesn’t just affect UK luxury, it affects all knock on tourism spending, which is desperately needed at this time.
Keep in mind- this is on top of the already lost existing £3.5 bn from non EU visitors and an expected £2.1 bn from EU visitors, coupled with additional unemployment costs of £3.5 bn and the loss of 70,000 supporting retail jobs upfront.
Second- this does incalculable damage to the UK’s ‘brand’ as a desirable shopping destination. Effectively, this damages the UK’s brand image and reputation. Across the non EU board (Far East, Middle East, USA, Russia and China), visitors have said that they are 63% less likely to visit the UK as a direct result of the removal of the VAT refund scheme, and 95% were likely to spend less when visiting the UK. This statistic was mentioned above, but significantly of this group, 41% of respondents said they would simply switch instead to visiting France. London therefore removes itself as a desirable shopping destination, and Paris becomes the go-to for luxury international shoppers. This marks the shift to luxury consumption as a continental attraction, and takes the UK off the map as a brand name for luxury shopping.
Again, more than numerical losses- this puts the UK luxury and retail system a at a deep disadvantage and has a knock on effect on both nascent designers and home grown craftsmen. And here we go, the unseen long term effects of the removal of tax free. Another knock on effect means that UK craftsmen, creators and nascent designers are now put at a competitive disadvantage. The UK luxury system is not only comprised of top tier players headquartered overseas. For example, think of anyone who is trying to sell their wares on Saville Row, or any UK new designers trying to break out in the luxury system. The ancillary effect of a retraction in overall spending is the suffering of internal UK luxury and retail.
It’s true, Alexander McQueen and Vivienne Westwood will probably be fine, but can emerging UK talent and established UK craftsmen make it through this given the already extremely challenging retail environment? That is not yet clear. Many emerging designers and in particular craftsmen rely on these overseas visitors and the UK’s reputation as a luxury and retail destination. Why go to Saville row for suits when you can go to Zegna in Milan? And get a discount. Further, if shoppers aren’t shopping, how do they discover new and upcoming UK designers? It makes everything that much harder, and deals an aggressive blow to already suffering UK creatives and craftsmen.
Lastly, the government argues that this scheme only benefits London, but as we can see, not so. As well as UK craftsmen and creators suffering, UK Tier 2 and Tier 3 cities will also suffer. 20% of tax free shopping is outside of London in cities like Manchester, Birmingham and Edinburgh. The £3.5 billion international spending in high street chains supports marginal stores in UK high streets. This move effectively solidifies the already impending death of the high street in regional cities in the UK.
Lastly- let us imagine a world where the UK does proceed with the tax free scheme (inclusive of EU visitors). In this world, the entire EU population can buy in the UK at a VAT free discount. How much would sales and profit leap in the UK as a result (and by extension taxable profit to HMRC)? How much inbound tourism would this result in? How much opportunity and growth for UK retail and its surrounding counterparts?
In sum- the removal of tax free spending is not only a loss for the government monetarily, and a potential loss of any extra revenue gained from EU spending, but puts the UK as a whole at a competitive disadvantage in terms of tourist arrivals and spending. Further, the move affects UK luxury and retail specifically, and the impact on brand value is much worse than a purely monetary one. The UK currently holds a strong position within the worldwide luxury and retail ecosystem, and this move greatly damages its position, desirability, and potential creative output.
Due to the impact of COVID, we are already at a point in the UK where we cannot afford to lose any more spending, income, or put ourselves at any sort of disadvantage. This scheme is disastrous and needs to be reversed or re-examined with immediate effect.
