Visitors cut spending on luxury goods due to Britain’s tourist tax

A new report from the British luxury council which represents around 600 businesses in London, has found that spending in the capital by tourists this summer is falling as awareness grows that they cannot reclaim VAT on their purchases.

Despite an increase for incoming tourists from the United States of 17% in the three months to June, spending by American visitors in the West End was down by 1% compared to pre-pandemic 2019. The picture is even worse for visitors from the oil and gas-rich GCC countries. Inbound tourism to the UK from the Arab states rose by 7% in the second quarter, but spending dropped by 17% from the same period in 2019.

UK retailers and brands including Watches of Switzerland, Berry’s, Harrods and Selfridges have been lobbying the government to reinstate VAT rebates, which were withdrawn as part of the Brexit agreement that came into force in February 2020. Liz Truss promised to bring back the perk during her short period as prime minister, but Rishi Sunak’s government reversed the decision.

Retailers argue that tourists, and even British customers, are diverting their spending to Continental Europe.  Data supports the case, according to the New West End Company. Spending by Americans in France is up by 183% in Q2 2023 compared to 2019 levels, and up by 174% in Spain. Similarly, spend from GCC visitors is up by 118% in France in Q2 2023 and by 112% in Italy,” the company reports.

“It’s plain to see that more tourists are becoming aware of the tax-free shopping issue and choosing to spend their money in European cities other than London. While it’s reassuring that our capital city hasn’t lost its appeal when it comes to attracting overseas visitors, the widening gap between footfall and spend in Q2 should set alarm bells ringing in Westminster,” says Dee Corsi, CEO of New West End Company.

“We’re hopeful that the Treasury will make the right decision after hearing the evidence from businesses directly impacted by this ‘tourist tax’ and will announce during the Parliamentary hearing to review the impact and cost of losing tax-free shopping as a first step towards possible reinstatement of the scheme,” she adds.

A separate survey by the New West End Company reveals that consumer sentiment on tax-free shopping is crystallising with 77% of international visitors to the West End saying they would spend more if they were able to claim back the VAT on their shopping, up from 72% when the survey was conducted in January 2023.

Almost three-quarters said they would be more likely to return to the UK if the VAT free shopping was reintroduced. “The Government continues to insist that scrapping the tourist tax will cost the UK money. All the evidence indicates that, far from a cost to the Exchequer, reintroducing tax-free shopping would have a net positive receipt to the Treasury of at least £350 million,” Ms Corsi concludes.