The prospect of reinstating duty-free shopping for international visitors to the UK briefly appeared on the schedule during Liz Truss’s brief tenure as Prime Minister. Reinstating duty-free goods was eagerly awaited by British tourism, hospitality and retail industries, as it would have generated sales worth an estimated GBP3 billion by 2027. Is the new government led by Rishi Sunak therefore missing an opportunity by removing it from the agenda?
Consumers commonly associate VAT and duty-free shopping with retail outlets located in airports. However, the vast majority of VAT-free shopping takes place in high street retailers including department stores, whereby inbound tourists can reclaim the VAT spent when leaving the country. Historically, this process entailed potentially cumbersome paperwork, although the UK did not have a minimum spending limit, thereby the process only lent itself to big-ticket items including luxury goods. In turn, sales assistants needed training on the formalities to offer the service, which was revoked in 2021.
China and Gulf States dominate UK inbound shopping tourism
The UK has an extremely strong reputation as a shopping destination, as it is the home of renowned luxury brands such as Burberry and Mulberry, in addition to London’s iconic department stores such as Harrods and Selfridges. Inbound shoppers to the UK run little risk of being sold counterfeit goods. Pre-pandemic inbound shopping accounted for almost 25% of UK inbound tourism receipts, more than food and activities combined. The sector was driven heavily by two source markets, China and the Gulf States, between them accounting for almost 60% of tax-free sales in 2019. The UK is less attractive as a shopping destination for US and European visitors, as prices are no cheaper than they are in their home countries.
Shopping is major motivation to visit the UK
According to the ONS International Passenger Survey, in 2015, shopping was a motivation for 23% of inbound visitors to the UK, rising to over 40% and 50% from high-spending source markets such as the United Arab Emirates and Saudi Arabia respectively. Due to Brexit, the UK could now potentially also offer duty-free shopping to visitors from EU member states. With increasing numbers of foreign tourists incentivised to visit the UK, traditional VAT-paid retail should also benefit. Industry sources suggest an elasticity that for every GBP1 that shopping tourists currently have to pay in VAT, GBP2 is lost in overall inbound retail sales. This elasticity rises to GBP3 for the key Chinese inbound market. Should the British pound remain weak in the longer term, it could also benefit the UK as a competitive shopping tourism destination. Indeed, the suspension of tax-free shopping is already having a major impact on revenues, with Mulberry stating that its share of sales to inbound tourists in its London boutique had fallen from 50% to “almost nothing” following the suspension of VAT-free shopping.
VAT-free shopping could reinvigorate the wider UK tourism economy
If Rishi Sunak and his chancellor Jeremy Hunt were to follow a route of reinstating VAT-free shopping for inbound tourists, it would likely increase inbound visitor numbers. In addition to retailers, the other major winners would be foodservice and lodging players. Although the UK Treasury would likely lose VAT revenues on retail sales, it could recoup these through VAT on foodservice and lodging, which are non-refundable. However, as these are labour-intensive sectors, it could regain income tax revenues through retail workers’ salaries, given that labour is one of the most taxed areas in the UK.
Many factors need to come together to make the UK an attractive shopping tourism destination
Finally, the potential success of the UK as an inbound shopping destination will not only depend on the government offering VAT-free privileges. With or without duty-free, the UK competes with shopping tourism destinations such as Paris, Milan and New York, although the latter is currently less competitive, given the strong US dollar.
Lack of duty-free benefits is not the only competitive disadvantage London faces as a potential shopping tourism destination. Arriving from many source markets, visitors to the UK need a separate visa to enter, leaving London at a disadvantage compared to Paris and Milan, both of which can be accessed on the same Schengen Zone Visa.
Meanwhile, Spain’s El Corte Ingles department store chain is actively promoting duty-free shopping, including campaigns targeting UK residents. The CEO of Mulberry was reported as stating that high-net-worth British customers were now shopping abroad to take advantage of VAT-free sales. Notwithstanding government policies, ultimately UK retailers need to develop their stores as attractive destinations for inbound tourists, even more so now that they will not be benefitting from VAT-exempt sales for the foreseeable future.
For more information about UK tourism, read our report, Travel in the United Kingdom