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Tax-free Shopping

Volume 826: debated on Thursday 15 December 2022


Asked by

To ask His Majesty’s Government what is their assessment of the impact on the United Kingdom economy of the abolition of tax-free shopping.

My Lords, as part of the reversal of almost all the tax measures set out in the growth plan, the Government are not proceeding with plans to introduce a new VAT-free shopping scheme. The Office for Budget Responsibility’s assessment of the withdrawal of the previous VAT-free shopping schemes showed that this would raise a significant amount of revenue and have a small and limited behavioural effect on tourists’ decisions to visit the UK.

My Lords, is my noble friend the Minister aware that, far from costing the Treasury £2 billion a year, reintroducing tax-free shopping would net the Treasury some £350 million a year? Tax-free shopping supports many important industries in our country, such as Harris tweed—as so brilliantly sported by my noble friend Lord Pickles in support of my Question. The introduction of tax-free shopping is supported by the left-wing Mayor of London and the left-wing SNP. In this country we are lucky to have numerous new Governments; whether it is levelling up, growth or economic stability, tax-free shopping supports all three. Will the Minister reconsider the Treasury’s nonsensical decision to abolish it?

Well, what I can say is that, on 28 November, HMRC and HMT officials held a round table with industry stakeholders to collate feedback on the Chancellor’s decision to withdraw the introduction. As I indicated in my initial Answer, evidence from VisitBritain continues to show that the key motivators for tourists visiting the UK are our rich history and heritage and vibrant towns and cities, and less so shopping.

My Lords, international tourists used to make up half of Mulberry’s trade in London; now it is almost none. Does not that immediately tell the Government something about the significant effect this is now having on the tourist trade? European cities will be the winners and we will be the losers unless the Government change their mind.

I do not agree with the noble Earl. Introducing VAT-free shopping would come at a significant fiscal cost because it would subsidise a large amount of tourist spending that already occurs without any relief in place. This is supported by OBR estimates which found that the withdrawal of the previous schemes would reduce visitor numbers by only 0.07%.

My Lords, do the Government understand that it may not affect the number of tourists who come to the UK, but they will stop spending in the shops and that will be lost revenue? Will the Minister not reconsider this matter?

Well, it has been considered—as I say, we had a round table in November—and the benefit is pretty marginal. As far as I can tell from walking around London, the visitors are still flooding into Britain. We also need to look to next year, when we have the Coronation, and remember that we must look after the visitors who come here. But, as I pointed out, the actual benefits are marginal.

My Lords, will the Government consider doing a proper cost-benefit analysis of this, which they have never done? Small shops are very much reporting that the actual spend has dropped very significantly. At a time when retail is under so much pressure, that additional loss will drive people out of business.

We do not have any plans to analyse this further. As I have said before, fewer than one in 10 non-EU visitors used the previous VAT-free shopping scheme, indicating that it is really not a pull factor for tourists. Canada and New Zealand also do not offer this type of tax-free shopping on the high street, and the USA does not have a countrywide system, yet all these countries are popular tourist destinations.

My Lords, the Treasury has a long history of downplaying the secondary effects of tax reductions. It has done it on corporation tax and the IR35. Oxford Economics tells us that 1.6 million visitors are attracted by VAT-free shopping. All those queues of people from China outside Harvey Nicks, Bicester Village and so on are bringing much- needed revenue to our economy. Will my noble friend the Minister ask his friends in the Treasury to reconsider the dynamic effects of this and other tax cuts?

We have no plans to reconsider this. I know that about 80% of the effect of this is on retailers—for whom I have some sympathy, I should say—in London, and 10% in Bicester Village. It is very much focused on those areas and we do not have any plans to rethink it.

My Lords, is it not sending quite an unwelcoming message to our European and American friends if, when they come here, they do not get VAT back, but when we shop in America or any country in the European Union we get their VAT back?

Yes, but it comes back to the initial analysis by the OBR, which is very clear. As my noble friend will be aware, there was a judicial review in May 2021 and the judge ruled very much in the Government’s favour. There was also a very clear vote in Parliament on the matter, so I too am very clear on it.

Can the Minister tell us whether the effective devaluation of the pound against the euro and the dollar is a subtle way of attracting tourists?

The noble Lord is ingenious in what he brings up. It is fair to say that the value of the pound has helped in bringing tourists to London. I say again that London right now is full of people from abroad walking around—and also from the domestic side, despite the fact that the cost of living crisis is hitting the most vulnerable and we are very aware of that.

My Lords, why does my noble friend not exercise a little imagination? He referred to the Coronation; people will flock to this country. Let us have a Coronation bonus period to see whether this really works. I am sure he will then be converted.

My Lords, is my noble friend not immensely encouraged by the enthusiasm for tax cuts on the Opposition Benches?

My Lords, the arguments for tax-free shopping range from a £2 billion cost to the Treasury to a £4 billion benefit to the wider economy; I cite the recent survey from Oxford Economics. Whatever the truth, given the dire need for economic growth, surely it falls on the Treasury to at least review these important numbers.

I can go this far, which the House will take at face value: of course, all taxes remain under review. The estimated cost of introducing a new scheme was around £2 billion per year. Although this would have stimulated additional retail spending, which HMRC estimated to be around £2 billion to £2.5 billion, it is a substantial cost to UK taxpayers and the relief would subsidise a significant number of purchases that occur without any relief in place, as I mentioned earlier.

My Lords, while it might not have been the primary driver of tourism into the UK, tax-free shopping certainly incentivised extra spending during people’s stays. It was right to scrap the chaotic mini-Budget, but can the Minister understand the frustration of retailers who have argued for years for the scheme’s return, only to have their reward taken away because the Conservative Party crashed the economy?

As I said earlier, on a serious note I have some sympathy for retailers—we admit that they will see some falling off of business—but I have made it quite clear that this is very much focused on London and Bicester Village. Having said all that, I live near Bicester Village and the queues going in on Sunday were enormous. Evidence from VisitBritain continues to show that the key motivators are still not to do with shopping and much to do with coming to see our excellent sights around the country.

In my noble friend’s Answer to our noble friend Lord Vaizey, he said this had been decided at a round-table meeting in the Treasury. Could we know who the people around this table are? Are they shoppers? For the record—please do not take offence at this—I would like to know the gender of this circular table.

Hopefully, I made it clear that the round table was for industry stakeholders to collate feedback on the Chancellor’s decision. There were three main concerns, which I am not going to go through. It was really to show that the Government remain in listening mode and taxes remain under review—which is true—but we do not have any plans to change this policy.

Perhaps I can come in and defend the Minister for a moment. We should actually be thinking about shopping less. I am so sorry to say this to a bunch of such dedicated shoppers, but we should make do with less and understand that the climate crisis means we should perhaps want to possess less as well.

I am almost tempted to agree with the noble Baroness—but, no, we want to encourage people to shop. On the matter of tourism itself, I am pleased to say that inbound tourism bookings were at about 70% of 2019 levels for the first half of the year. Although I admit our recovery is slower than that of a number of our close international competitors, there is a bit of a nuanced picture because, as I alluded to earlier, domestic tourism has seen a better recovery trajectory than inbound tourism levels. So watch this space; as I said, it is a slightly better picture than has been made out from certain quarters.