How much is the ‘tourist tax’ harming retailers

The Centre for Economics and Business Research has calculated that the “tourist tax” is costing the UK £10.7bn in lost GDP and deterring two million tourists from visiting the country per year. The report from the Centre for Economics and Business Research (CEBR) claims that the additional revenue generated by restoring a VAT rebate scheme would outweigh losses associated with VAT refunds by £2.3bn. For every £1 refunded in sales tax to foreign tourists, the UK treasury would gain £1.56bn in other taxes, thanks to the nature of tourist expenditure.

Lalage, founder of an eponymous brand that specialises in British womenswear and handbags with stores in Burlington Arcade and on Beauchamp Place, said that the ban on tax-free shopping has been “absolutely devastating” for her business. Lalage’s handbag sales are largely dependent on visitors from Gulf countries. Last year, when she benchmarked her sales against 2018 rather than 2019 (as 2019 was an exceptional year for her), she found that in 2022, for the 15 weeks from the start of the financial year to mid-July, she was 17% up on the same period in 2018. However, for the nine weeks from mid-July to mid-September, which is the peak tourist season, she was 68% down. She explains: “This is entirely due to the lack of tax-free shopping, as many of my customers did not visit the UK and went instead to France, Italy, and even Greece.”

In 2023 for the same period (now all potential visitors to the UK know about the loss of tax-free shopping, which some didn’t in 2022 and have therefore not visited), her figures from mid-July to date are 30% down on 2022, and her sales for this period are now lower than in 2017, despite having two shops and treble the costs.

Luca Cassina, president of retail at Planet and an expert in the tax-free space, added that some retailers are still recovering from COVID. What we have seen recently is some sort of return to normal, but we’re not yet back to the same levels as in 2019. “Shopping is an essential part of travel. Along with memories, tourists also like to make small or big purchases from the country they visit, and this is especially true for people coming from Asia and especially for Chinese,” Cassina adds.

According to Cassina, in 2020, a research from Planet revealed that the Chinese were the top shoppers in the UK before Brexit, and now 93% of them say that they would not come back to the UK or that they would come back and spend up to 50% less because of the ban on VAT-free shopping. Planet also produces a monthly report that delves into the tax-free market across Europe. Key data points in the most recent Planet Intelligence Report show that French retailers now have nearly 50% of Europe’s tax-free market. When the UK removed the scheme, almost all of its tax-free shares went to France. Additionally, Chinese tourists are continuing to increase their dominance of Germany’s tax-free market, as their share has grown from 10% in January to 32% in June. The report also stated that the US continues to command significant purchasing power across Europe—just below 25% of the market—and China now has a 12.1% share; its welcome return has been triggered by the lifting of international travel restrictions.

The ban on VAT-free shopping is definitely an added pressure for retailers, as they are already combating existing issues such as inflation and the cost of living crisis. Lalage says that her business is already seeing a downturn. “Initially, my sales came from my UK customers and my Gulf customers. If, for whatever reason, we weren’t getting twice as many Middle Eastern visitors, the UK business was usually quite strong. From August on, most British customers don’t shop because they’re all away. But that’s when I would be the busiest, with all of the sudden influx of tourists. Now, we don’t have that, as UK customers are affected by the cost of living crisis and tourists by the ban on tax-free shopping,” Lalage said.

Cassina adds: “While European retailers look forward to the prospect of further summer growth as US and Chinese visitors continue to spend across the continent, UK retailers continue to be disadvantaged by the lack of a tax-free shopping scheme, which means they are not competing on a level playing field.” He believes that reinstating tax-free would have a huge impact, as he estimates the country would be able to generate £350m in tax revenues and, at the same time, create a lot of job opportunities. He explains: “The current ban on tax-free shopping doesn’t only affect retailers but also has an impact on tourism, hospitality, travel, leisure, and all the different industries that are relying on travellers and tourists. It’s like a domino effect.”

Despite having online stores as well, Lalage said that she hasn’t seen her online international sales increase. Cassina notes that independent retailers are affected the most by this ban or even franchises, he said, “Well, the larger chains have their shops in different cities and countries, so at the end of the day, they may be losing in the UK, but they probably must be gaining in other locations. The most affected ones are the midsize independent retailers that are only in the UK. Most of them don’t have the resources to open a store in Paris or any other place.

Given the current situation, retailers are going above and beyond to keep their businesses running and trying different ways of getting more customers in store. Lalage, for instance, has announced plans to open a franchise in Saudi Arabia. According to Lalage, “If customers can’t come to the UK, I’m going to take my business to them. I did three trunk shows in Kuwait, one successful, the other two not so successful, but I managed to get a very good German-owned partner who is based in Dubai, and they are opening a franchise in Saudi Arabia.” Lalage has also tripled her marketing budget and is working with Arabic influencers to make their presence known on social media platforms.

However, in doing so, Lalage has realised that all these efforts haven’t resulted in a complete boost for her business. She said that by expanding internationally, the margins are small, and she would prefer to offer employment to people in the UK. She also noticed that Arabic social media influencers do not have the same pull as they used to. “There’s a big loss in some way or another,” she said.

Cassina believes that while the ban on tax-free shopping is putting a strain on retailers, they can incorporate more and more technology into their businesses. He said, “What we see from our research is that modern consumers are expecting an omni-channel experience; they want to have a shop-like experience either online or on their phones. They want to have stock visibility before they go into the store. Or if the product is not available, they expect some sort of, you know, buying online at home or receiving at the hotel experience; they also value the idea of buying online and picking up in store. So retailers should include these aspects to enhance the customer’s shopping experience.” He adds that the payment experience should also remain as flexible as possible, especially for cross-border travellers.

Cassina concludes: “If the government doesn’t bring VAT-free shopping back, that would be disappointing for a lot of retailers. But I would go back to telling retailers to adopt technology, such as digital wallets, and increase contactless limits as well, so that customers can have a seamless experience. Basically, think of anything that makes a smoother experience for shoppers.” He continues: “When we talk about tax-free shopping, a lot of people think about London only, but that’s hardly true. A large majority of people have stated that they are not just interested in London, but they want to come to the UK and travel and experience other locations as well. So the domino effect doesn’t stop at the border of London. So by reinstating a tax-free scheme, the whole of the UK would benefit.”