MPs want detailed analysis of VAT retail export scheme cancellation

MPs have criticised government plans to end the VAT retail export scheme (RES) at the end of this year, when the UK leaves the EU, saying it has not provided a wide enough analysis of the potential impact on the tourism industry

RES allows non-EU visitors to the UK to claim a VAT refund from customs when leaving the country. In September the government announced that this scheme would cease from 1 January 2021.

At the time, there was no accompanying detail on the likely tax impact of this decision, but there has been strong opposition to the move from businesses such as Heathrow, Selfridges, Harrods, Burberry, Paul Smith and Value Retail, which owns the Bicester Village outlet centre in Oxfordshire, who argue that the move will dent sales of high-end products to overseas visitors, notably from the US and China.

Following pressure from the Treasury select committee, HMRC has now published an tax information and impact note (TIIN) on the changes.

This indicates that the Treasury is likely to see a £400m-plus uplift in tax from 2023/24 once the travel industry recovers from the effects of Covid restrictions.

The TIIN also suggests withdrawing RES ‘may have a marginal impact on retailers in Great Britain, to the extent they currently offer the scheme to overseas visitors’.

It points to user data which suggests over 90% of the current use of the scheme is in London and Oxford and says the VAT savings, and therefore incentives, arising under this scheme are partly offset by the impact of administrative fees paid to refund providers.

HMRC also argues that the Office for Budget Responsibility has analysed the behavioural response from the withdrawal of the scheme and estimates that from the 1.2m visitors who used the scheme in 2019 approximately 20,000-30,000 fewer tourists will visit Great Britain a year because of the change in policy (around 0.07% of all visitors to the UK in 2019).

Retailers will also still be able to offer VAT free shopping where they export the goods direct to an address outside the UK. 

However, the Treasury select committee says that by effectively abolishing tax-free shopping for non-EU visitors to the UK, ending VAT RES will lead to fewer high spending tourists visiting the UK from places such as the US, China and the Middle East and that those who do come will spend less.

Mel Stride, chair of the Treasury select committee, wrote to Jesse Norman, financial secretary to the Treasury, about the issues and the delay to the TIIN.

Commenting on the correspondence and the impact assessment, Stride said: ‘I’m pleased that the government has listened to the committee and published an impact assessment, although it would have been helpful if this had been published earlier.

‘No estimate of the effects on the wider tourism and leisure sectors has been provided. These sectors will be worried that up to 30,000 tourists, many of whom are high spending, could be dissuaded from visiting the UK.

‘The government should now commission an independent evaluation of the effects of the measure and publish it.’

In his letter, Stride emphasised that the committee was also concerned about the ad hoc nature of the announcement and the late publication of the tax change analysis.

Stride said: ‘Tax policy announcements have been scattered throughout the year rather than, as is customary, at fiscal events.

‘Whilst it has been far from a typical year, the government must not use this as a precedent for the future.

‘One of the key principles of effective tax policy making is predictability. Where possible, the government must ensure that it makes tax policy announcements at the next available fiscal event.’

Useful links:

Tax information and impact note (TIIN)

Letter to Stride

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