The Treasury has signalled the government will end VAT refunds on purchases made by overseas visitors on 31 December, when the UK leaves the EU, despite claims from the travel and luxury goods sector that this will harm tourism
Following a consultation on duty-free and tax-free goods carried by passengers, the Treasury has announced the VAT Retail Export Scheme (VAT RES) will not be extended to EU visitors after Brexit, and will be withdrawn for non-EU visitors in Great Britain.
This means that overseas visitors will no longer be able to obtain a VAT refund on items they buy in GB and take home with them in their luggage.
However, the Treasury says retailers will instead continue to be able to offer VAT-free shopping, consistent with international principles of taxation, to non-EU visitors who purchase items in store and have them sent direct to their overseas addresses.
In its response to the consultation, the government acknowledged part of the problem with VAT RES is the concern that if it was extend to EU visitors, then the system for handling the paperwork could be overwhelmed.
The response stated: ‘Many stakeholders have told us about the operational challenges of the current system, and that they do not want to see an extension of the scheme to the EU in its current paper-based form.
‘By contrast other stakeholders have explained the benefits that they see from the VAT RES and that they would like to see the scheme extended to the EU in digital form, which the government continued to explore in parallel with the consultation.’
However, the government has indicated it is not in favour of moving to a digital system, on the basis that ‘VAT RES is a costly relief which does not benefit the whole of GB equally, with current use of the scheme largely centred in London’.
The changes will take effect from 1 January 2021.
The move has been opposed by the Association of International Retail (AIR), which represents businesses that makes sales to visitors to the UK from abroad, particularly in the light of the collapse of the tourism sector in the face of Covid-19 restrictions.
AIR estimates VAT RES would generate £1.bn additional revenue sales through the UK and a total of £2.1bn for the wider tourist economy.
In a statement on the impact of Covid-19, AIR said: ‘Retail, hospitality and tourism are some of the worst affected industries. Retail sales to overseas visitors, usually £6bn pounds each year, have collapsed. Major stores that depend heavily on international shoppers have already announced redundancies and many hotels that rely on high value international guests have yet to re-open.
‘It is clear that the slow recovery of international visitor numbers will be led from Europe as traditional long-haul markets are slower to recover.
America is still in the middle of its public health crisis and a worsening diplomatic relationship with China may slow any return of high spending Chinese visitors. VisitBritain is concentrating its marketing budget on European countries.
‘Extending tax frees shopping would be a great additional incentive to visit the UK from Europe to complement VisitBritain’s and the GREAT Britain campaign activities. Shopping is one of the top reasons for people visiting Britain.’