A new report has found that the UK has taken a £10.7 billion ($13.7 billion) hit to its economy after it removed tax-free shopping for foreign tourists.
Analysis by the Centre for Economics and Business Research also found the so-called tourist tax has hit GDP and resulted in the loss of two million visitors.
Big-spending visitors to Britain were previously able to claim 20 per cent back off their luxury purchases, a perk that attracted millions to London and elsewhere in the country.
However, Chancellor Jeremy Hunt scrapped the tax relief in an attempt to plug the gap in Britain's finances after successive economic crises. He said the move would provide revenue worth an estimated £2 billion for the UK Treasury.
However, critics say the decision has deterred wealthy tourists who have opted to go to other destinations for their shopping, such as Paris and Milan, instead of spending their cash in West End hotels, restaurants and theatres.
“We estimate that a fully utilised tax-free shopping scheme could have increased GDP by £9.1 billion in 2022,” the report says. “Applying this figure to 2023's projections, a tax-free shopping scheme could have boosted the size of the economy by £10.7 billion.”
The CEBR calculations estimated that spending eligible for tax-free shopping stood at £6.6 billion last year, rising to £7.7 billion this year.
Assuming all visitors took up the VAT rebates, around £1.1 billion of this would have been returned to customers in 2022, or £1.3 billion in 2023.
It estimated that the cost reduction would have increased visitor numbers by 1.7 million last year, rising to two million in 2023.
“This highlights that the additional activity stimulated by tax-free shopping, and the associated increase to tax revenues from such activity, significantly outweigh the corresponding loss of revenue from sales tax specifically, even in scenarios with lower take-up rates”, the report says.
Analysis by the tax-free shopping data company Global Blue previously showed that tourists visiting Britain from GCC states spent 35 per cent less than they did before the Covid pandemic, but spent double in France and 66 per cent more in Italy.
However, a boom in high-end tourism from American visitors was enough to offset this decline in Britain.
“Tourists engage in other activity beyond their retail purchases, bringing a range of economic benefits that will be felt not only on the high street, but right through the retail supply chain,” said Sam Miley, managing economist at CEBR.
“By making shopping purchases cheaper, tax-free shopping schemes act as an incentive for tourists to visit the UK over other countries.”
Calls have been growing for the current Conservative government to perform an about-turn on the “tourist tax” in a bid to reintroduce growth into the struggling UK economy, which has narrowly avoided a recession in recent months.
In April, Prime Minster Rishi Sunak was challenged by hundreds of businesspeople across Britain over the “spectacular own goal” of a post-Brexit VAT change.
In an open letter, business leaders including Burberry chief executive Gerry Murphy told the Prime Minister his move to scrap the VAT refund for tourists had made Britain the “least attractive” shopping destination in Europe, with every country remaining in the EU still offering sales tax rebates to foreign shoppers.