Government and Labour reject reinstating tax-free shopping

Sir Geoffrey Clifton-Brown (Con) began the debate by highlighting that the UK is the only major European country that does not offer tax-free shopping. He disclosed a study by Oxford Economics that indicates that restoring tax free shopping would add £4.1bn to UK GDP, and create 78,000 new jobs across the country.

Clifton-Brown asked the government to reconsider its position on this matter, saying that “the government’s current position is based on inaccurate and incomplete Treasury figures that say that the cost of tax-free shopping would be £2 billion a year in refunded VAT”. He suggested the Treasury commission an independent assessment through the Office for Budget Responibility (or a respected audit firm) of the full economic effect of tax free shopping on the UK figures and all the figures that are available.

Nickie Aiken (Con) – whose constituency includes London’s West End and Oxford Street shopping district – noted tourists pay VAT for other things such hotels, restaurants and theatres, therefore the independent review should “look not just at retail but at the possible VAT revenue that the Treasury would receive if there were more international visitors coming here to shop”.

Clifton-Brown agreed with Aiken’s point and said “this is what the Tresary figures do not cover at the moment”. Apart from VAT, corporation tax, air passenger duty and other duties would be brought into the Treasury, he said.

Aiken also highlighted the importance of this issue for the economy and many businesses, and stated that, according to VisitBritain, for many tourists “tax rate is a consideration when they decide where they wish to travel and how much they are willing to spend when they travel”.

“As a Conservative, I believe strongly in the growth potential of cutting taxes” said Aiken. She described tax-free shopping for international visitors as” a perfect example of when cutting a tax rate will increase the total amount of taxable spending”. She requested an independent review of ‘the whole situation’, looking at VAT and other taxes, including national insurance for the increased number of employees.

Richard Thomson (SNP) was sympathetic to Clifton-Brown’s case. Thomson outlined what he thought were the Treasury’s ‘false’ assumptions for removing tax free shopping:

• eliminating tax-free shopping would have no significant impact
• extending tax-free shopping to EU resident tourists would attract few additional visitors to the UK

Noting that Aberdeen airport is in his constituency, Thomson said shopping comprises about 45% on average of the revenues that regional airports take in. “That revenue is absolutely vital in keeping airports going and route development for the benefit of the area.” Every time he speaks to airport managers, “they tell me that they are losing sales hand over fist… because of the decision… The policy is very much to the detriment of not only the operation of regional airports such as Aberdeen but the surrounding tourist and business economy.” He hoped that the minister would look favourably on Clifton-Brown’s request for the Treasury to commission additional research to inform ministers.

Tanmanjeet Singh Dhesi (Labour), the new Shadow Exchequer Secretary, argued that stability and certainty are important for businesses to plan and thrive. However, in relation to tax-free shopping, “the uncomfortable truth for the government is that ministers changed course on this policy twice in the space of two months last autumn”. Dhesi stated that his party has carefully considered this matter and “do not believe that reinstating tax-free shopping for international visitors should be a priority for the use of the billions of pounds of public money”.

The Shadow Treasury Minister said that Labour would seek to revive Britain’s high streets by replacing the current system of business rates with ‘a new and reformed system’.

Clifton-Brown enquired whether Dhesi will support his plea for more research. The Shadow Treasury Minister reiterated that “this cannot be a priority for what I hope will be the incoming Labour government”.

The Financial Secretary, Victoria Atkins, responded to the debate for the government. She started her remarks by clarifying that the VAT retail export scheme (VAT RES for short) is still available for all non-UK tourists who buy items in store and have them delivered to their overseas addresses, as well as to those shoppers who buy UK companies’ goods online from overseas. Clifton-Brown interrupted the minister’s speech to highlight that this scheme has been very little used. The minister acknowledged this but said that, “[i]n fairness, it may be that people do not know that it is available.” 

Atkins noted that “one third of VAT RES users surveyed by HMRC were charged more than 50% of their refund in fees, and the average was 36%, so the savings to the consumer may be far less than the 20% rate of VAT”. She emphasised that “VAT remains our third most productive tax in the UK”. She further noted some steps that the government has taken to attract more visitors, including working with industry to set up the tourism industry working group on international competitiveness and demand.

Aiken questioned the minister about this new group and asked whether, if they recommended that VAT RES needs to be reintroduced, the Treasury would consider it.

Atkins explained that “the group will not necessarily have access to the macroeconomic data that the Treasury, the OBR and others, including the retail industry itself, have”. However, she is keen to hear evidence and data from the retail sector.

Additionally, the Financial Secretary reconfirmed the government’s commitment to make the UK “an attractive place to visit, both to support tourism and hospitality and to support our retailers”. In regard to the Treasury’s analysis and methodology, she stated that the “the Treasury costings include estimates for an increase in the numbers, but it does not agree that as many extra visitors would come to the UK as a result of changing the tax measure” as is claimed by Oxford Economics. The government predicts that 50,000 to 80,000 additional tourists will visit the UK if such a scheme is introduced, Atkins suggested.

She appreciated the concern that the Treasury’s methodology does not fully account for an increase in visitors, nevertheless, she stressed that “the fiscal cost of £2 billion was made up not just of that factor, but of many other components”, including the VAT loss on purchases from EU and non-EU visitors.

Atkins said that, as with all taxes, the government keep VAT policy ‘under constant review’. They have committed to understanding the latest evidence on VAT shopping, and on the impact of the VAT RES scheme on shopping in British high streets. In fact, “the Chancellor has already invited evidence submissions from industry to inform our policy making”.

Responding, Geoffrey Clifton-Brown noted that the minister had set out why she believes the Treasury’s methodology relating to the £2 billion cost of reinstating VAT-free shopping is correct. He said he would take that away, talk to industry and might come back to her to discuss it further. He noted that the OBR’s numbers have a high uncertainty rating and repeated “that we badly need an independent study”.

You can read the full debate here.