The VAT Retail Export Scheme was withdrawn after December 2020 despite protests from retailers and from Global Blue, the company that specialises in obtaining VAT rebates for tourists.
Post Brexit the government would eventually have had to extend the scheme to tourists from the EU as well as from outside the area. Paradoxically, because of the Northern Ireland Protocol, the scheme still exists in Northern Ireland.
The government has claimed that the abolition of the scheme will generate increased revenues (it’s estimate is £0.5 billion) at minimal cost to the economy and that the extension of the scheme to EU visitors would have cost further tax revenue.
The industry, citing reports by my Cebr colleagues and by other consultants, says that the scheme increases tourism and tourist spending and because of this generates increased tax revenues, not a reduction. The Cebr estimate is the withdrawal of the scheme has cost about 1.2 million lost tourists, about £3 billion lost GDP and that tax revenue far from being increased will be reduced by about £700 million. Cebr also estimates that had the scheme been extended, further tourism would have been generated, further spending and further tax revenues.
Every single other major tourist economies levying VAT has a rebate scheme for tourists. Indeed various tourist jurisdictions in the US have sales tax rebates for out of state visitors. There are 130 countries in the world that levy VAT and 54 of them (which includes all the major tourism destinations) have tourist VAT relief schemes. In Australia, which levies sales taxes, there is a scheme for tourists to get rebates on both these and on wine duties.
I believe that the reason the British government has abolished the scheme unlike any other major tourist destination in the world is bad modelling by the Treasury. This seems to assume that individual tourists from places like China submit their own VAT relief forms whereas in fact most such tourists for shopping trips travel in groups. As a result, the Treasury bases the number of tourists that will be deterred by the abolition of the scheme on the number of VAT relief forms rather than on the number of tourists in a group that each of these forms cover.
Had Covid not intervened, it would have been possible to prove who was right – the Treasury or the economic consultants. UK tourism and tourist spending statistics could have been examined carefully and compared with those from rival tourist destinations. But tourism has been disrupted so badly by Covid and its aftermath that this is harder to do.
But increasingly tourist data is becoming available for both the UK and other destinations that allows some interim conclusions to be reached. December 2022 data for UK tourism has just been published showing total visits down 14% and spending down 11% compared with December 2019, the last pre Covid December. Meanwhile tourist spending in France for the whole of 2022 was up 2.1% compared with 2019 with total visitor numbers ‘roughly flat’. Data from Global Blue who administer tax refunds to tourists seems to show substantial diversion of shopping from London to Paris for visitors especially from the Gulf States and China.
It will take a few more months data for us fully to understand trends (and some of the summer UK tourism data will be distorted by the Coronation boost) but it is starting to look as though the hit to UK tourism from the abolition of duty free shopping is even larger than my Cebr colleagues and I predicted.
What is most irritating is that the government was warned. But instead of listening to those of us who warned them, the Treasury issued briefing notes to MPs making derogatory comments about our analysis. But in real life it is turning out that it was the Treasury’s own analysis that was flawed (indeed it was described as containing ‘schoolboy errors’ in the High Court).
People have lost jobs and businesses have been shut down because of a totally avoidable policy error. The House of Commons Treasury Committee needs to enquire why this has happened and to demand changes in civil service procedures to make it more receptive to external advice.
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The author is deputy chairman of Centre for Economics and Business Research.
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