Stubborn Sunak is shooting London in the foot with tourist tax

High-end tourism will struggle in Britain this summer as long as VAT levy for overseas visitors remains in place

London will miss out on a bumper season for European travel due to the so-called tourist tax. Photographer: Hollie Adams / Bloomberg
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My pal in the travel industry was most clear. This summer sees the Olympics held in Paris. It’s the first time the Games will have been held since the ending of Covid and the lifting of flight restrictions. It’s going to be a bumper season for the European tourist trade, as a result. Except for London.

That was his message: other European capitals and cultural centres could look forward to a bonanza as visitors from across the globe take advantage of the ending of the outbreak, unleash the money they saved during the pandemic and buy holiday packages that include the added attraction of the Olympics.

But not London. Why? Because our government insists on charging every overseas visitor VAT of 20 per cent.

Next to watching the sporting action, dining and visiting the sights, the other activity high on the tourist wishlist this summer is shopping. They want to come to Europe and experience the designer boutiques and department stores and the accompanying glamour, and they’ve got cash to spend.

They’re not stupid, though. Why bother to buy that bag in Bond Street when it’s 20 per cent cheaper in the Champs-Élysées or Corso Vittorio Emanuele II? In fact, given that time is precious and faced with that extra cost, why go to London at all?

The UK, led by Rishi Sunak’s administration, is shooting itself in the foot where the 20 per cent levy is concerned.

Naming Sunak is deliberate. For it was Sunak who, as Chancellor, reintroduced the charge in 2021. Now, as Prime Minister, he is under pressure to repeal the measure.

That, however, entails him admitting he made an error in the first place and as we know, politicians, or at least those as stubborn as Sunak, do not like conceding on anything.

The Spring Budget is due next week and campaigners were hoping that Jeremy Hunt, the current Chancellor, would put the government’s hand up and scrap the tax.

But Nigel Huddleston, the minister responsible for the tax regime, is seemingly dampening the prospect of change.

In a letter to one of the leading campaigners, he writes that it is “not possible to introduce the same system as before, given that it would now need to be open to visitors from the EU as well as the rest of the world. Any new scheme, no matter the design, would take time to legislate for and implement in order to prevent non-compliance risks and ensure operation”.

Then comes the kicker: “The Chancellor has been clear that being responsible with the public finances is a key priority. A new VAT-free shopping scheme could subsidise a large amount of tourist spending that already occurs without a tax relief in place, without bringing any direct benefits to the British public.”

So, they can’t see the point, in other words. Tourists are busy, purchasing away, with a 20 per cent surcharge. Axing it would have little effect.

The UK, led by Rishi Sunak’s administration, is shooting itself in the foot where the 20 per cent levy is concerned.

This is hokum. Huddleston may want to ask himself why 400 business leaders have called for its abolition. This isn’t a tax, the ditching of which benefits them directly. It doesn’t provide an immediate boost to their bank balances.

Of course, it may as they predict an uplift in tourism and consumption, but that’s for the future. The main, instant gain will be in persuading foreigners to visit London and the UK and to spend – and not choose to go and buy elsewhere.

What’s also nonsense is Huddleston’s assertion that dropping the tax is somehow complex. It isn’t. The tax was introduced only three years ago. The same wording that applied then can surely be used again, this time without the need to spell out an exclusion for EU visitors.

Huddleston was replying to a letter from Sacha Zackariya, chief executive of ChangeGroup and Prosegur Change – a British-based retail foreign exchange and bureau de change company, urging the government to return immediately to how we were.

Zackariya is keen that we “capitalise on tourists visiting the Paris Olympics this summer and encourage them to visit the UK at the same time and benefit from the same VAT-refund scheme they would otherwise be able to access in Madrid, Paris, Berlin or Milan”.

He wants Huddleston and his Treasury colleagues “to reintroduce exactly the same system we had before, which will be quick and simple. Any complex new IT system will be fraught with delays and errors.”

Nor will the extension of the tax-free policy to visitors from the EU be a handicap. Quite the reverse. This would be a Brexit benefit, as 500 million EU shoppers could take advantage of the UK’s measure and enjoy a 20 per cent discount. Britain’s hard-pressed retailers would receive a fillip.

Sir Rocco Forte, the hotelier, goes so far as to describe it as “an enormous Brexit opportunity”.

Lifting the tariff would not require a primary statute wending its way around Parliament; much quicker, secondary legislation would suffice.

It’s not as if the tax is a major earner for the Treasury. The Office for Budget Responsibility has previously estimated that restoring VAT-free shopping would cost the government £2 billion in lost revenue. This is out of a total tax take of around £800 billion.

Despite Huddleston’s reticence, businesses remain confident that the measure will go. Whether that occurs in time to cash in on the Paris Olympics is a different matter.

In any event, it does require Sunak to eat humble pie. Hopefully, he will see it makes sense. Everyone makes mistakes and can be forgiven, Rishi, even you.

Published: February 28, 2024, 7:00 AM
Updated: March 06, 2024, 8:58 AM