Tax-free Shopping for International Visitors

(Limited Text - Ministerial Extracts only)

Thursday 7th September 2023 Westminster Hall

[The Financial Secretary to the Treasury (Victoria Atkins)]

It is a pleasure to serve under your chairmanship, Dr Huq. It is the first time I have done so, and I am delighted to be chaired so well.

I welcome the hon. Member for Slough (Mr Dhesi) to his place. It is a pleasure to see him there and I look forward to our doing battle over the Dispatch Box in the coming months. I thank my hon. Friend the Member for The Cotswolds (Sir Geoffrey Clifton-Brown) for securing today’s discussion. He is an assiduous advocate on the issue, and his speech showed the great care and thought that he has put into it. I genuinely thank him for his speech, as I do my hon. Friend the Member for Cities of London and Westminster (Nickie Aiken); I will be dealing with some of her points later.

I hope the House will forgive me if I start with some points of clarification. I have said in this Chamber before that in the very complex world of tax law, VAT is the most complicated area; it is also the most litigious. When the Treasury or His Majesty’s Revenue and Customs faces litigation on VAT rules and their interpretation, the organisation can often bear millions of pounds of risk on behalf of the taxpayer on a single word in a piece of legislation. That is why I am going to be very particular about the terminology. I am conscious that lots of people will be paying great interest, and it is important that we get the terminology right.

The phrase VAT-free shopping can be used in the context of this debate, but for the avoidance of doubt, for those acts of shopping by tourists there will often be taxes and duties payable on their purchases on their return to their home country. We are focusing on what is actually called the VAT retail export scheme—VAT RES for short. I note that airside tax-free shopping is also in scope, but it has not been raised so I will not trouble the House with it. VAT RES is still available for all non-UK visitors who purchase items in store and have them delivered to their overseas address, which many shoppers would rather do than have to take them all home in their luggage. It also applies to overseas shoppers who buy online and have items delivered, so they can support British businesses from far afield.

[Sir Geoffrey Clifton-Brown]

I anticipated that my hon. Friend would raise that—in fact, I nearly put it in my speech to stop her doing so. The proportion of people who want to reclaim the tax and have goods delivered—let us think of, say, a Chinese person visiting this country—is minute compared with the proportion who shop in this country and then physically reclaim the VAT and go home. So while that scheme is available, it is very little used.

[Victoria Atkins]

In fairness, it may be that people do not know that it is available. I do not know whether shops or brands advertise it to their customers. If a consumer is buying a larger item, they may think it much more convenient to have it sent home. The scheme is available should shoppers wish to make the savings described in the debate.

I acknowledge this has not been the case today, but some people call the current situation a “tourist tax”. Again, that is not correct, because the change in the law that happened a couple of years ago means that we simply expect overseas tourists to pay the same amount of tax as British people do when making a purchase, especially when so many countries—including some of the alternative shopping destinations that can be mentioned—do impose a genuine tourist tax on their visitors. So please let us not refer to it in that way, because that would not be correct.

My hon. Friend the Member for The Cotswolds understandably referred to a 20% saving from such VAT refunds, but that assumes that shoppers receive all the VAT back. In reality, we know that the companies processing refunds, who are sometimes the retailers themselves, charge significant administrative fees for the service. Indeed, one third of VAT RES users surveyed by HMRC were charged more than 50% of their refund in fees, and the average was 36%, so the savings to the consumer may be far less than the 20% rate of VAT.

To try to set in context the environment in which I am considering this request—alongside many others—since we voted to leave the European Union in 2016, the Treasury has received some £50 billion-worth of helpful suggestions and requests for products or items that should be zero-rated or have VAT relief applied to them. Cases are made in different debates on different subject matters where we are asked to make VAT relief decisions. Of course, VAT remains our third most productive tax in the UK, and it helps to support many of the public services that we all care so deeply about. Those are serious considerations that we must take into account for any request for VAT relief that we receive.

I completely understand the intentions behind my hon. Friend’s work—indeed, I commend him on it—and I share his wish to ensure that the UK remains an attractive place to visit and that support for our retail sector and high streets is strengthened. Both intentions and aspirations are shared across the Government. Therefore, if I may, I will take a couple of moments to help the House understand what we have done to achieve exactly that.

Through VisitBritain and the GREAT campaign, we have invested significantly in marketing the UK both domestically and internationally to stimulate demand and support recovery. According to updated forecasts from VisitBritain, there are due to be 37.5 million visits to the UK this year, which is some 92% of the level seen in 2019 before the pandemic, and inbound visitor spending is forecast to be £30.9 billion, which is up 9%. Those updates follow the stronger recovery we are seeing, with spending by American visitors up 42% to a record £6 billion last year alone. Sadly, international visitor numbers are still below 2019 levels for all G7 members and large European countries in 2022 and 2023, but of course that comes against the backdrop of the UK economy doing much better than was forecast over the last year or so, as we saw really encouraging growth figures more generally for the economy last week. Rather than ours being the weakest post-pandemic recovery in terms of visitor numbers, the post-pandemic recovery in the UK has been stronger than in countries, such as Germany and Japan, that continued to offer VAT RES. Post-pandemic recovery in the UK has also been stronger than in the United States and Canada in both 2022 and 2023.

We want to make sure that the tourist experience in the UK is as great as it can possibly be. One of the ways in which we have tried to reduce the bureaucracy and the barriers for tourists coming into the UK is by creating an exemption from visa requirements through our new electronic travel authorisation scheme to boost international tourism numbers, with visitors from the Gulf Co-operation Council states and Jordan being the first to benefit. We have also worked with industry to set up the tourism industry working group on international competitiveness and demand, which has been established to recommend practical policy options to support tourism recovery.

[Nickie Aiken]

I was interested to hear about that new collection of people working together to improve the tourist offer. If that group recommended that VAT RES be reintroduced to help the growth of tourism, would the Treasury be minded to accept that recommendation?

[Victoria Atkins]

My hon. Friend will know that that group will not necessarily have access—in fact, I would be surprised if it did—to the macroeconomic data that the Treasury, the OBR and others, including the retail industry itself, have. We understand that every decision we make will be scrutinised in due course by the independent Office for Budget Responsibility, so there are processes that we have to go through. As I have said, however, and as I will repeat in this speech, we are very keen to hear evidence and data from the retail sector. We very much keep this policy under review.

In respect of high streets, it is argued that the reintroduction of the VAT RES scheme would be a useful move to support our world-leading retailers. This Government are proud to have provided huge support to the retail sector, not least through the extreme challenges that that sector faced during the pandemic. Hon. Members will recall the measures that we took to ensure that the sector paid no business rates—support that was worth £16 billion to businesses in the retail, hospitality and leisure sectors throughout the pandemic—as well as the very practical support measures such as the furlough scheme, bounce back loans and even small business grants for the smaller businesses in our communities, all of which helped to secure and safeguard millions of jobs across the UK economy and keep businesses surviving through that very difficult time. We would argue that that support helped to keep our high streets, our retail centres and our communities thriving.

We clearly recognise the importance of retailers and will continue to act effectively to support them. At autumn statement 2022, the Government announced business rate changes and tax cuts worth more than £13.5 billion over the next five years, which will support the retail, tourism, leisure and hospitality sectors, as well as other parts of the economy. These announcements included a freeze to the business rates multiplier for 2023-24, which is a tax cut worth £9.3 billion over the next five years, meaning that all bills are 6% lower than without the freeze.

We also introduced an Exchequer-funded transitional relief scheme, which many sectors had asked for and which is worth £1.6 billion, to protect an estimated 700,000 rate-payers facing bill increases due to the increases in rateable value. Indeed, I have had the pleasure of visiting that great British company John Lewis, on Oxford Street, to see for myself the positive impact that these and other changes have had on that really important British business.

[Nickie Aiken]

I thank the Minister for giving way yet again. I am interested in what she says about a great British company such as John Lewis, which is based in my constituency, and its flagship branch in Oxford Street, which is also in my constituency. Does she agree that, if we are to encourage people back to places such as Oxford Street—the nation’s high street—those places have to have a great offering? They have to look good, be clean and have brilliant shops, and not so many of the candy stores and that type of retail offer, which we seem to have at the moment and which is really disappointing. Also, the Mayor of London has a huge role to play in ensuring that there is a tourism offer, and the current Mayor is letting down London.

[Dr Rupa Huq (in the Chair)]

Order. May I just say that we are straying from the subject matter, which is tax-free shopping? Also, when you say “you,” that means me. I did not do anything—it is “the Minister”.

[Victoria Atkins]

I hope to ingeniously incorporate VAT RES into my response to my hon. Friend. She is absolutely right that, although the advocates of the scheme place a great deal of emphasis on it as a tax lever to encourage tourists back to the United Kingdom, in reality tourists come to the UK to look at our beautiful architecture, visit theatres, visit wonderful historic locations, and—dare I say it—visit the Lincolnshire wolds and other places of great beauty around the country.

[Sir Geoffrey Clifton-Brown]

The Cotswolds.

[Victoria Atkins]

Including, of course, the Cotswolds. We must look not just at how to encourage more tourism through tax levers, but at the actual offering to tourists when they are here in Oxford Street, Burford or Bourton-on-the-Water, so we ensure that those places are as attractive and inviting as they can possibly be. I hope that the House is therefore in no doubt that the Government are determined to do everything they can to make the UK an attractive place to visit, both to support tourism and hospitality and to support our retailers.

As I have said, the VAT retail export scheme is still available to those non-UK visitors who purchase items in store or online and have them delivered to their overseas address. However, as we heard from my hon. Friend the Member for The Cotswolds, a significant Treasury analysis in 2022 estimated that introducing worldwide VAT RES shopping would come at a fiscal cost of around £2 billion each year. I know that my hon. Friends and others have questioned that analysis and methodology, and I will try to address some of those queries and concerns. We also know that industry-commissioned analyses have reached different conclusions, including the Oxford Economics report, which I have gone through carefully with officials. I will try to break some of those down.

The Treasury costings include estimates for an increase in the numbers, but it does not agree that as many extra visitors would come to the UK as a result of changing the tax measure, as suggested by the external research that we have seen so far, particularly the Oxford Economics analysis. For example, the Government estimate that 50,000 to 80,000 more people would come to the UK if we introduced such a scheme. My hon. Friend thinks the figure would be higher, and I think the Oxford Economics report suggested something in the region of 1.6 million, but the 50,000 to 80,000 figure has been endorsed by the OBR, which is the independent body that scrutinises Treasury calculations and assumptions. Indeed, my hon. Friend has asked the OBR to review the policy.

The figure of 50,000 to 80,000 extra visitors is just 4% of that suggested by Oxford Economics, which suggested that 1.6 million more people would come every year. To put that in context, the total number of tourists we welcomed in 2019 was just over 40 million. We therefore find the external assumption to be much stronger than the Treasury was able to find evidence for.

Let me try to reassure observers about the Treasury’s methodology. I know that the concern is raised that it does not properly account for an increase in visitors. I reiterate that the fiscal cost of £2 billion was made up not just of that factor, but of many other components. For example, the cost includes the VAT loss on purchases from EU and non-EU visitors. The cost also takes account of changes in behaviour. It includes an adjustment for the changes in the number of visitors, the changing spending patterns of visitors and the impact of digitalising a VAT RES scheme.

It is also said that the costings overestimate VAT refunds to EU shoppers, but, in fact, EU visitor spending is adjusted to account for the fact that these visitors tend to spend less than non-EU visitors. Government analysis assumed that EU visitors would spend at about 60% of non-EU levels, but, for comparison, Oxford Economics used 63%, so the Government’s assumption was in fact more generous.

Even taking into account those effects, the Government still estimate that the measure would cost in the region of £2 billion each year, and the methodology for calculating that £2 billion cost is consistent with the methodology signed off and certified by the OBR in 2020.

However, as my hon. Friend the Member for Cities of London and Westminster emphasised, tourism must be seen in the round. We should be confident that the UK’s attraction as a destination extends well beyond our shopping, even though we have pretty brilliant shops in our great city and around the country. Evidence from VisitBritain shows that the key motivators for tourists visiting the UK are our rich history and heritage and our vibrant towns and cities, not just shopping.

HMRC has surveyed VAT RES users and found that VAT RES did not make the list of reasons for visiting Great Britain. Furthermore, two thirds of those surveyed said that they would have purchased the items regardless of the scheme, while 28% would have purchased fewer items, meaning that 95% of tourists would still shop even without the scheme.

To emphasise that point, I have asked officials for figures on how much tourists spend when they are visiting. I am told that the average spend per visit was £696 in 2019 and £848 in 2022, which is an increase of 8% in real terms. That tends to indicate that international spending habits in the UK are not directly informed by whether VAT RES is in place.

I accept, of course, that individuals will make different decisions on VAT, and that some customers are more price-sensitive than others. However, taken in the round, those are the figures with which I have been provided. We have looked at the Treasury’s analysis and the OBR’s analysis, which suggest that the increase in tourist spending is marginal, but the policy would still come with a significant price tag.

My hon. Friend the Member for The Cotswolds advocates for a review. As with all taxes, the Government keep VAT policy under constant review. Further to that, we have committed to understanding the latest evidence on VAT shopping, or on the impact of the VAT RES scheme on shopping in British high streets. That is why the Chancellor has already invited evidence submissions from industry to inform our policy making.

I would like to take this opportunity to thank the retail and hospitality industry for providing so much data already for my officials. I am obviously keen for them to carry on with their businesses—earning money, making profits, employing people and contributing to our growing economy. I am grateful to them for taking the trouble and time to help us with this. We expect further evidence in the coming weeks, which we look forward to receiving and will consider very carefully.

Although I am obliged to stress that the independent OBR certified the Government’s costings for the removal of the VAT RES scheme and that we have set out our methodology for how the £2 billion estimate was calculated, I have heard my hon. Friend’s call for an independent review and I will reflect carefully on his eloquent submissions.

We are committed to ensuring that the UK remains an attractive place to visit and committed to supporting our retail sector. None the less, the Chancellor is clear that being responsible with the public finances is a key priority. In that regard, VAT RES would subsidise a large amount of tourist spending that already occurs, arguably, without a tax relief in place. But we very much want to listen to industry and support long-term sustainable growth, so we will continue, as I say, to receive evidence and keep the policy under review. I am extremely grateful to my hon. Friend for setting this debate in motion.

[Sir Geoffrey Clifton-Brown]

I am grateful to you, Dr Huq, for giving me the opportunity to briefly reply to this debate; it is very important. I thank the Minister for setting out in detail for the first time how the Treasury’s methodology works. I will come back to that in a minute. Before she did so, she set out in detail the reliefs that the Treasury has given to businesses in rates and VAT, as well as high street grants and business grants during the dreadful pandemic, all of which were very much appreciated by businesses and no doubt kept a lot of them going. Some of those reliefs still persist today, for which I am sure businesses are grateful. But that is no substitute for businesses getting profits into their bottom line, and one way of doing that is to get more tourists into this country spending more money. That is why I think the issue is so important.

The Minister has fully set out the case for why she believes the Treasury’s methodology relating to the £2 billion cost to the Treasury is correct. I suggest that I take that away and ask industry to go through, in depth, all the things that she has mentioned and come up with a statement on whether they agree on each individual point, and if not, why they disagree and what the effect would be. If, at the end of the day, we still disagree with the Treasury’s methodology, may I come back to her with a comprehensive statement and discuss it further? I would still say that we badly need an independent study.

I have not brought my brief today, but I recall that when the OBR addressed the Treasury Committee, it said that it placed low reliance—I think that is what it said—on the visitor number forecasts.

[Victoria Atkins]

I was anticipating this point and, indeed, quizzed my officials about it. I think the phrase my hon. Friend refers to is a high uncertainty rating. I am told that that rating given by the OBR is not unusual in the context of Government policy. That is because it is driven by behavioural uncertainty, which is difficult to predict with limited data and the additional complexity linked to EU exit. It was not, I am told, because of concerns with the methodology employed. As I say, we are very keen to hear further evidence and views in due course.

[Sir Geoffrey Clifton-Brown]

I am grateful to my hon. Friend for being so well informed to be able to answer that individual point. However, I suspect, again, that industry and the OBR will disagree with her over that matter.

I thank the Minister very much, and you, Dr Huq, for so ably chairing this debate. It has been thoroughly useful. The fact that we have had relatively few speakers has enabled us to examine the whole issue in detail; I think industry will be very grateful for that. I suspect that it will come back with all sorts of replies that will rebut what my hon. Friend has said. Let us see and then I will go back to her and I am sure the debate will continue. Nevertheless, I thank her very much for what she has done this afternoon.

Question put and agreed to.

Resolved,

That this House has considered tax-free shopping for international visitors.