It's time for a tax-free shopping U-turn, Mr Sunak

Luxury industry voices demanding the reinstatement of the old tax-free shopping scheme have reached deafening levels. Luxury heads are door-stopping the Prime Minister at business conferences on the subject to ram home their point of view – well, it was Rishi Sunak who scrapped the old scheme when he was Chancellor.

If you listen to the doomsayers, London is on its knees and every tourist from Paris to Portland is avoiding London like it was 1665. They are spending their dollars, yen and whatever else in Paris, Milan and Madrid because London has become 20% dearer because they can no longer claim the VAT back as they leave the country.

The government scrapping ‘Tax-Free Shopping’ is a misnomer. The government moved the tax to the individual to pay when the goods were shipped to its final destination. Basically, tourists could no longer avoid their country’s import taxes by putting their purchases straight into their luggage. At the point of sale, consumers could have the VAT taken off, but would then have to have the purchase shipped directly to their home. For many tourists, from destinations with high import charges, this means they wouldn't make any savings.

The luxury businesses never explained the system properly announcing that tax-free shopping in the UK was dead. At the time, it wasn’t in their interest to explain and demonstrate it. While the tourist market was quiet, due to a lack of foreign tourists in the wake of the pandemic, and the grumbling was relatively mild, but now we have the first chance of a decent tourist season – especially seeing Chinese visitors return – the voices are really starting to demand a reversal back to the old system.

The UK Treasury scrapped the long-standing scheme that allowed tourists to shop tax-free in 2021, arguing it was a 'costly relief which does not benefit the whole of GB equally’. It was momentarily bought back by Kwasi Kwarteng when he was momentarily Chancellor in September 2022. It was then quickly reversed.

The government has refused a U-turn since, arguing that it would cost £2 billion in lost tax revenue, although, according to the Evening Standard, studies have shown that this would be more than outweighed by a £4.1 billion boost to GDP through extra tourist shopping.

Prime Minister Rishi Sunak at Business Connect, where he was challenged on the removal of tax-free shopping by Burberry chair Gerry Murphy

Brands such as Fortnum & Mason and Mulberry wrote an open letter, last month, to the Chancellor Jeremy Hunt describing the policy as “a spectacular own goal”. According to the Oxford Economics forecast, the last six months will have cost the UK £1.5 billion in missed international sales.

The luxury goods companies should offer to make running the tax free shopping scheme more efficient or offer to fund it. They can easily see how many of their sales had VAT rebates and could offer to all pay a small percentage. If sales are going to increase so much then they won’t mind a couple of percentage points of the sale going towards a scheme that they say made that sale in the first place. Call it the tax-free affiliate scheme! Take the pressure off the government who don’t want to be seen not be levelling up the country (though it isn't just luxury businesses and it isn't just businesses based in London who want the scheme reintroduced; many high street brands - in particular those operating in airports - and businesses in Scotland, which has a high level of tourism, for instance have also condemned the closure of the scheme).

It is worth remembering that since Brexit every tourist now will be able to claim the VAT back, over a certain amount, when shopping in the UK. This will be a massive boon for the whole industry. It won’t just be Americans shopping in London but the French and Italians. If everything is 20% cheaper and the exchange rate is good, then we should expect Bond Street to be as busy as Bicester Village. It should also increase the frequency of trips from neighbouring countries in the EU.

London is in a bit of funk at the moment. This could one of the things to give it a really boost and get its mojo back. It will have a knock effect to restaurants, hotels and visitor attractions. It could really get the capital buzzing again. London wants and needs these kind of high-spending tourists and there are so many new luxury hotels to fill.

Rishi Sunak is a numbers guy. He’s also being a bit stubborn because it was his idea to scrap the scheme. He will look at the data from the last couple of years and weigh up whether it has really generated any extra income. And whether the benefits outweigh the negatives.

People like tax-free shopping and it is an attraction. This episode has been bad PR for the UK’s luxury shopping image and the industry hasn't helped itself. The numbers will show that it isn’t worth the continued fight, and I’ll eat my tax-free hat if tax-free shopping isn’t ‘reintroduced’ by the end of 2023. If I was a luxury brand I’d be signing that lease on Bond Street just about now.

Main image: Bond Street. Alamy.