London's luxury stores fear losing shoppers to Europe amid call for return of tax breaks

Level of spending in France, Spain and Italy has shot ahead of London

Harvey Nichols in London's Knightsbridge. The National

Luxury retailers in London fear the city is losing its pull as a shopping destination as tourists from the US, China and the Gulf are flocking to Paris and Milan, where tax breaks still offer a way to cut the cost of their purchases.

As a new Budget is announced by Chancellor Jeremy Hunt on Wednesday, the industry wants him to reinstate sales-tax-free shopping for overseas visitors, which ended in 2020 when Britain left the EU.

Department stores Harrods and Harvey Nichols, Chelsea property manager Cadogan and The Lanesborough Hotel have joined forces with hundreds of retailers to urge Mr Hunt to change the rules.

"We've heard from some brands that they're prioritising Paris for investment in stores," said Steve Medway, chief executive of the Knightsbridge and King's Road Partnerships.

"They're seeing the sales."

Mr Medway said international visitors contributed £28.4 billion ($34.5 billion) to Britain's gross domestic product annually, of which Knightsbridge and the King's Road are a substantial part.

Data from international tax refund company Global Blue shows that while spending by US visitors to Britain has recovered to 2019 pre-pandemic levels, their spending in France, Spain and Italy has shot ahead.

To compound the problem, British shoppers are also starting to spend more in the EU, where they can reclaim the value-added tax charged on goods.

Now, amid signs that some luxury brands are investing more in their French stores on the Champs Elysees than in their London outlets, industry executives say the tax incentive should be restored to keep Britain competitive.

They say its continued lack will have an impact on the whole of tourism, including hotels, restaurants, taxis, museums and theatres.

Harrods department store in London, UK - in pictures

The government says tourists can still enjoy UK tax-free shopping if they ship goods directly to an overseas address, and that it scrapped VAT-free shopping to raise revenue after an assessment found it would not have a large effect on tourism.

Burberry, Britain's biggest luxury retail brand, warned last year that London was losing out to other European cities over the VAT rule.

Handbag maker Mulberry said the axing of VAT-free shopping was a major factor behind the closure of its Bond Street store last month.

Sarah Jaconelli, spokeswoman for the New West End Company, which represents 600 businesses, said Britain had scored a massive own goal.

"You can go to Europe and get a 20 per cent discount, why wouldn't you?" Ms Jaconelli said.

The Global Blue data is stark. It shows spending by American visitors to the UK was back to 101 per cent of 2019 levels in 2022, but that France and Italy achieved more than twice those levels at 256 per cent and 226 per cent.

For visitors from Gulf states — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE — UK sales were only back to 65 per cent of 2019 levels.

France, meanwhile, was at 198 per cent from 2019, Italy 166 per cent and Spain 158 per cent.

More worrying for the future, a Global Blue survey of 10,000 Chinese who visited Europe in 2019 found that Britain was also dropping in appeal for them.

While England was the second most popular destination behind France among large European countries in 2019, the survey showed only 42 per cent were now planning to visit Britain, down from 70 per cent in 2019, with Spain, Italy and Germany more popular.

"The Chinese will be the most critical demographic to watch because they've always been the most price-sensitive," said Mr Medway, whose partnership represents hundreds of businesses in the luxury districts.

"That's why tax-free was so important for them, and now we are the only country in Europe that doesn't offer it."

Harrods managing director Michael Ward said if no action was taken, the impact would be seen far beyond the stores, with hotels and restaurants in London already noting the absence of international shoppers.

Cadogan, the main landlord in the west London districts of Chelsea and Knightsbridge, whose estate spans almost than 38 hectares, also called on the government to act.

"At a time when we should focus on incentivising international travel, we are now at a distinct and unnecessary disadvantage to our neighbouring EU cities," chief executive Hugh Seaborn said.

Chinese resident Hang Hen, 22, and a friend were shopping on New Bond Street on Tuesday morning. He said he had not considered the VAT issue before, because he was generally spending his parents' money.

"Maybe I'll keep much more money to go to France," Mr Hang said.