Retailer optimism about the return of tax-free shopping for tourists to the UK has been rising but may be misplaced. A newspaper report has said that the so-called tourist tax is unlikely to be reversed in the spring budget.

Nigel Huddleston, the relevant government minister, was reported by The Times saying in a letter that it’s “not possible to introduce the same system as before, given that it would now need to be open to visitors from the EU as well as the rest of the world. Any new scheme, no matter the design, would take time to legislate for and implement in order to prevent non-compliance risks and ensure operation.”

If the report is correct, it’s a major blow for the retail sector in destination shopping locations.

The UK abolished tax free shopping for tourists in its previous form when the country left the EU. It now only exists if tourists are prepared to have their purchases shipped home rather than carrying their 20% discount bargains with them.

The government has been firmly against the idea of reversing its decision about what has become known as the tourist tax. But there were signs that it was softening its stance when it announced a review into the benefits such a strategy change might bring.

What’s the problem?

Huddleston’s correspondence highlights the problem that any revival of tax-free shopping would bring. But what exactly are those problems? Well, before its abolition, companies that facilitated VAT refunds for tourists had continually stressed how archaic the UK system was compared to systems in many other countries.

In the UK, tourists were forced to queue – often for hours – to get their refunds at the airport via a paper-based process, rather than it being a quick and easy automated process. Those specialist company had also said that they had the technology already available to enable the UK to bring its system into the 21st century quickly and easily.

Without such tech, not only would the revival of tax-free shopping create the same problems that existed before, but with the prospect of millions of shoppers from the EU potentially able to take advantage of tax-free shopping, the old and laborious system would probably crack under the weight of demand.

Yet the issue remains that retailers and others urging the abolition of the tourist tax say government assessments of it costing the UK exchequer £2 billion a year are way off the mark and that it would actually benefit the economy by hundreds of millions of pounds.

Only last week, GlobalData Senior Apparel Analyst Pippa Stephens told us that there are clear advantages to trying as hard as the UK can to bring back tax-free shopping.

“If the government were to reinstate tax-free shopping for tourists visiting the UK, it would be a welcome relief to brands and retailers across the apparel sector, especially luxury players. The move would help London win back tourists from the likes of Paris, Milan, and Madrid, boosting both the overall economy and luxury apparel sales.”

Not just for the rich

In a rebuttal of the idea that the perk is just a benefit for the very wealthy, she explained why the tourist tax has been more of a deterrent for aspirational shoppers than for those visiting the UK to buy ultra-luxury items.

“Since the termination of tax-free shopping at the end of 2020, aspirational shoppers, who tend to buy entry-priced luxury items using their savings, have cut back on purchases when visiting the UK due to prices now being 20% higher than in nearby countries.

“This has caused the UK to be particularly impacted by the slowdown of the luxury market as consumers also grapple with inflationary challenges, with Burberry highlighting how its performance in the UK lagged Continental Europe in the 26 weeks ending 30 September 2023.

“This reinstatement would enable the UK’s luxury market to return to its perpetual outperformance again once inflation subsides, with the fortune of domestic players like Burberry and Mulberry particularly reliant on tourist sales, as luxury shoppers prefer buying designer goods in the brands’ home markets.”