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VAT Retail Export Scheme

Volume 806: debated on Tuesday 20 October 2020


Asked by

To ask Her Majesty's Government what assessment they have made of the financial impact on (1) the retail, and (2) the tourism sector of the decision to withdraw the VAT Retail Export Scheme from 1 January 2021.

My Lords, the Government have announced that the VAT retail export scheme will not be extended to EU visitors and will be withdrawn for all non-EU visitors following the end of the transition period. The final costing, including behavioural assumptions and an assessment of the fiscal effects, will be subject to scrutiny by the independent Office for Budget Responsibility and will be set out at the next forecast.

My Lords, I wonder whether the Minister has seen the research by the Centre for Economics and Business Research which says that this tax reform puts 128,000 jobs under threat and could see a fall of £6 billion in retail sales and cost the Treasury £3.5 billion, whereas if the scheme is kept and extended to EU visitors it could create 20,000 jobs and generate £1 billion of retail sales. Given the Chancellor’s excellent work in supporting retail and manufacturing during the pandemic, I wonder whether the Treasury would look at this reform again.

I am glad that my noble friend has recognised the support that the Government have put in for retail during the pandemic. Unfortunately, the Government disagree with the analysis in that report, and with two key assumptions in particular regarding the impact on non-EU visitor numbers. The first is that those numbers will reduce by 1.17 million. When the total number of users of the VAT RES is 1.2 million, that assumes that all users will no longer come to the UK. The second assumption, which is even more stretching, is that the number of non-EU visitors will reduce by 4.96 million—four times as many people as currently use the scheme who, it is assumed, will stop coming to the UK in response to the scheme’s withdrawal.

The Government have to get money in as well as spend money out. Considering the hardship that many families are currently facing, does the Minister agree that this change is proportionate, fair and timely?

My noble friend the Minister might want to read the CEBR report again, because it is based on Global Blue’s research and those assumptions have been verified. However, will she consider focusing on high-spending visitors? Twenty per cent of users are responsible for around 50% of all tax-free shopping, and the highest 1% of spenders spend an average of £60,000, saving themselves £12,000. Those people will choose to go to cities other than London such as Paris. Therefore, will she consider postponing the scheme for high-value purchases while further research is undertaken in a post-Covid environment?

My Lords, of course purchasers can still benefit from the Shop & Ship method of VAT-free shopping. In addition, research from VisitBritain shows that cultural attractions remain the key motivation for visiting Britain, followed by the variety of places to visit. Tax-free shopping does not appear as one of the reasons in that research.

My Lords, the Minister will understand the obvious link between inbound visitors’ retail spend and the spillover effect on culture and visitor attractions. To take one example, a third of the 15 million West End theatre tickets sold annually are sold to overseas visitors. What assessment has been made of the impact of ending this scheme on culture, entertainment and visitor attractions, which are already suffering so badly as a result of the pandemic?

My Lords, as I have just noted, it is in fact culture that drives visitors to the UK rather than VAT-free shopping. The route of VAT-free shopping is still available through Shop & Ship. To support the wonderful cultural sector in the UK, we of course have the £1.57 billion cultural recovery fund.

My Lords, when the UK withdraws the VAT retail export scheme, we will become the only country in Europe not to offer tax-free shopping to international visitors. The Government will have had representations on the effect that this might have, putting retailers and tourism providers at a competitive disadvantage when tourism hubs are already struggling due to Covid-19. Can the Minister outline what engagement was undertaken with businesses and their representative bodies and why the scheme is ending in January 2021 rather than later?

My Lords, January 2021 represents the end of the transition period, and the Government have to make a decision on whether to extend the scheme to all visitors, including EU visitors, who do not currently benefit from it, or to withdraw it. Our view was that extending the scheme could cost up to £0.9 billion, and we had to assess the value for money of that against other priorities that the Government have.

My Lords, this is kicking an industry when it is already down. As the Minister knows, there is great dispute over the numbers that the Treasury is working on and over the impact of this as an incentive to draw tourists to the UK. Will she consider, at least for a period, leaving the current scheme in place until there is genuine recovery in the tourism industry and in retail? Does she recognise the number of jobs that are at risk if the call that she and the Treasury have made is wrong and we see between 40,000 and 100,000 jobs lost?

My Lords, the option to keep the current scheme in place does not exist. Either we need to extend it to EU visitors, which will attract a significant cost, or we need to end it. We have taken the decision to do the former. As I said, our understanding of the research is that visitors to the UK are driven by a wide range of factors, this not being the primary one. As I said in response to my noble friend’s Question, the OBR will conduct an independent analysis of the Government’s work on this policy.

I will follow the theme of the supplementary question from my noble friend Lord Vaizey. With the withdrawal of the scheme in January 2021 and the proposal that EU visitors be able to buy UK VAT-free goods from retailers only where the retailer arranges transport for the goods from the UK as an export, does the Minister agree that this potentially reduces footfall and places an additional burden on retailers, particularly high-street traders, when most are struggling to survive? Does she also agree that, given the present circumstances, the Government should perhaps think again in order to help small and large retailers?

My Lords, our understanding is that the benefit from the VAT RES flows almost entirely to two places: central London and Bicester Village. High streets across the country need our support during the pandemic. That is why we have the future high streets fund of £675 million, and the towns fund, supporting 100 towns with £3.6 billion of funding.

My Lords, the Government conducted a public consultation on the future of the scheme in which we took into account the views of business leaders and those within the sector. We also did our own analysis and had to weigh up the costs of extending the scheme against its potential benefits.

My Lords, what research and monitoring will the Government undertake after 1 January so that they know what the effect of their decision has been? Does the Minister agree that Shop & Ship merely demonstrates the inevitability of goods being taxed effectively in the country where they are consumed—that being the logic of the internet—and that we ought therefore to give way on tax-free shopping but be much better at collecting tax from goods that people ship to the UK?

Well, my Lords, I am sure that we will keep the impact of this decision under review. With regard to Shop & Ship, it is a much more effective way to deliver on the international norm when the consumption tax is paid in the country in which the good is consumed. The VAT RES is open to much more potential for fraudulent use compared to Shop & Ship.

My Lords, this issue was last considered in 2013, when tourism was benefiting from the prestige of the 2012 Olympics. Even at that boom time, HMRC strongly backed tax-free shopping, because it encouraged large numbers of high-spending international visitors to come to the UK. We need tourists now more than we have ever needed them before, and I have not met one person within the tourism industry who agrees with this; they totally disagree with what the Government are saying. So why are the Government insisting on doing this against the advice of the industry? Because the industry believes—and it does know what it is talking about—that this will lead to very significant job cuts.

My Lords, the change in the position since 2013 is that the Government can no longer apply the scheme only to non-EU visitors. The end of the transition period and WTO rules mean that we are faced with the decision to extend it to all visitors or get rid of the scheme altogether. Given the costs associated with the scheme and our understanding of the primary drivers of people’s reasons for visiting the UK, we have taken the decision that we have.