Tourist tax drains £11bn+ from UK economy says new report

The so-called tourist tax is “deterring two million foreign visitors from coming to the UK and costing the economy £11.1 billion in lost GDP,” according to new economic analysis.

The ‘tax’, which is basically the removal of VAT-free shopping for international visitors to Britain post-Brexit, is claimed by the British government to be the right move for the country that keeps money in its economy and avoids benefiting only visitors from abroad.

However that claim has been debunked by a number of studies and the latest, from the Centre for Economics and Business Research (CEBR), finds “additional revenues generated by restoring the VAT-free scheme would outweigh the cost of VAT refunds by £2.5 billion”.

Over 420 business leaders, including the heads of M&S, Harvey Nichols, Primark, Jigsaw, Kurt Geiger, Heathrow, Gatwick, Burberry, Bicester Village and Mulberry, have also submitted an open letter to Chancellor Jeremy Hunt calling the tourist tax “a spectacular own goal”.

MPs from all parties have joined calls for the government to reverse its current strategy.

CEBR used tourist data released last week to examine the impact of Rishi Sunak’s decision to scrap the decades-old VAT-free shopping scheme for tourists in 2021.

It believes that reversing the decision “would deliver a significant boost to the public finances because of the amounts spent by tourists across the economy”.

Jeremy Hunt promised at the time of the autumn statement to “look again at the numbers” with hopes raised among retailers and brands because he also indicated that he hoped restoring tax-free shopping would prove affordable.

And this new analysis suggests that not only would it be affordable but it would be hugely beneficial, not just directly for retailers but across hotels, restaurants, transport and the arts too.

Last week, data from the Office for National Statistics showed tourist numbers bouncing back after the pandemic, with 10.9 million overseas residents visiting the UK in Q3, which included the crucial summer season. This was up 923,000 on the year, or 9.3%.

Between them they spent £10.1 billion, which was a rise of 11.2% (£1 billion) year on year. That looks like – and undeniably is – good news. But visitors numbers are still short of the level they were at pre-pandemic before VAT-free shopping was abolished. In Q3 2019, some 11.9 million overseas residence visited the UK. 

Not only does that mean a shortfall of 1 million visitors compared to pre-pandemic, but the shortfall is actually much larger given that now the UK is no longer in the EU, visitors from the bloc would also have been able to take advantage of VAT-free shopping in Britain. That would potentially have ignited visitor numbers to the UK as the country would have been the only major shopping destination in Europe to offer fellow Europeans the chance to save money on their luxury shopping.

CEBR has estimated that if the UK still offered tax-free shopping, like every country in the EU does, visitor numbers would have been 589,000 higher in Q3 and their expenditure would have been an estimated £1.3 billion higher.

The wider economic impacts of additional visitor expenditure would have delivered up to £3.5 billion in extra GDP in the quarter, the report claims. And there would have been an annual output boost of that £11.1 billion figure mentioned earlier.

It all means the since CEBR analysed the annual impact of the tourist tax last year, it now thinks the negative impact of keeping the current rules and the positive effect of reintroducing VAT-free shopping are both bigger than it thought in 2023.

Sacha Zackariya, author of ‘Leading Travel and Tourism Retail’ and CEO of Prosegur ChangeGroup, one of the leading providers of ATMs, currency exchange bureaux and tax refund services globally, which commissioned the research, said: “The Government is shooting itself in the foot, sucking inbound spending out of the economy when it is desperately needed to support growth and jobs. It was ludicrous to introduce this penalty on the sector just as it desperately needed to recover from the pandemic. This damaging tax must be eradicated at the Budget in March and the previous simple tax refund solution brought back before this summer’s Olympics in Paris.”

CEBR Managing Economist Sam Miley added: “Q3’s data showed that 2023’s summer tourism season was the strongest for a number of years, albeit still falling short of pre-pandemic levels of activity. Our analysis suggests that the operation of a tax-free shopping scheme would have helped to close this gap.”