Rishi Sunak dampens hope of reversal of duty-free 'tourist tax'

UK PM says policy does little to boost wider economy as he resists pressure from London businesses

Shoppers from overseas are choosing to spend in places other than London, business figures have complained. Bloomberg
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British Prime Minister Rishi Sunak has ruled out the return of a tax break for tourists, despite pressure from businesses, saying such benefits only go to part of central London rather than the country as a whole.

Before 2021, foreign visitors from outside the EU were able to reclaim sales tax on purchases in Britain, in the same way they still do when shopping in the 27-member bloc.

Businesses such as luxury brand Burberry, high-end shops, hotels, restaurants and tailors have complained international shoppers are now choosing to spend in destinations such as Paris and Milan, rather than London.

Mr Sunak told LBC radio he avoided talking about tax policy because of the impact his comments could have on the markets.

But he said about 97 per cent of the benefit of the tax went to "a very small area in central London".

"From a levelling-up perspective, it was a very specifically concentrated tax break for people," he said on Wednesday, in reference to the government's policy of trying to boost wealth across the country.

Calls have been growing for the 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, Mr 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.

Recent analysis showed the decision to revoke tax-free shopping had caused a £10.7 billion ($13.7 billion) hit to the British economy and reduced the number of visitors by nearly two million.

The Centre for Economics and Business Research (CEBR) report said the duty-free scheme had economic benefits "not only on the high street, but right through the retail supply chain".

“We estimate that a fully utilised tax-free shopping scheme could have increased GDP by £9.1 billion in 2022,” the report said. “Applying this figure to 2023's projections, a tax-free shopping scheme could have boosted the size of the economy by £10.7 billion.

“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."

Analysis by the tax-free shopping data company Global Blue previously showed tourists visiting Britain from Gulf Co-operation Council countries 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.

Updated: August 02, 2023, 12:00 PM