Tourist Spending: VAT

Baroness Penn Excerpts

Wednesday 24th May 2023 Lords Chamber

[Baroness Doocey]

To ask His Majesty’s Government what assessment they have made of the impact of VAT on tourist spending.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

The Government engaged with varied stakeholders and produced analysis on the cost of VAT-free shopping before withdrawing the previous scheme. Government analysis done in 2022 that took increased tourist spending into account found that introducing worldwide VAT-free shopping would come at a fiscal cost of £2 billion each year. Furthermore, the OBR’s assessment of the previous VAT-free shopping scheme showed that its withdrawal would have a limited behavioural effect on decisions to visit or spend in the UK.

[Baroness Doocey (LD)]

I find it so difficult to understand why the Government keep saying that the reintroduction of VAT-free shopping for tourists would be a problem for the country and would cost much more than it would bring in. All the mounting evidence suggests that the opposite is the case. The tourists who come to the UK at the moment are spending about the same as they did in 2019, but US tourists who are going to France, Spain and Italy are spending at the rate of three times what they did in 2019. Does the Minister really believe that this disparity is nothing to do with the fact that we abolished duty-free spending for tourists? I ask the Minister to at least re-look at the figures as a matter of urgency, because our retailers are really struggling, and they need and deserve a level playing field.

[Baroness Penn (Con)]

My Lords, I reassure the noble Baroness that the Government continue to monitor the evidence around VAT shopping, as we do keep all taxes under review. As to the process the Government went through in making their decision, I reassure the noble Baroness that we engaged with a wide variety of stakeholders on the removal of the VAT scheme, including Border Force, retailers, VAT refund providers, refund agents, airport operators and shoppers. That research took place in parallel with a consultation which produced a range of views. So the Government did make every effort to look at the evidence available when reaching this decision, including their analysis of the costs of the policy.

[Lord Forsyth of Drumlean (Con)]

My Lords, would my noble friend welcome the conversion of the Liberal Democrats to the idea that cutting taxes results in more revenue? Could she explain to them that, at the moment, we need that revenue because of the level of borrowing the Government have?

[Baroness Penn (Con)]

I absolutely agree with my noble friend that levels of government borrowing are high because of the impact of both the Covid pandemic and the war in Ukraine. One of the reasons that levels of debt are high is that we have provided strong support to sectors such as tourism during the difficult years of Covid, and we are also providing strong support to them to recover from the pandemic and build back visitor numbers.

[The Earl of Clancarty (CB)]

My Lords, the Minister should look at the Oxford Economics report from last year, which showed a net economic benefit from tax-free shopping. Does she not accept that this is about an ecology of tourism—not just high-end shopping but the hospitality trade, theatres, concert halls and more? The UK needs to clearly show that it is open for business, as other countries are capitalising on this failure.

[Baroness Penn (Con)]

My Lords, I would say to the noble Lord that the Government have looked very carefully at the Oxford Economics analysis, and we do appreciate that some of the costs would be offset by higher visitor numbers and their spending. However, the OBR’s and the Government’s previous analysis suggested that the offset was marginal and the policy still comes with significant fiscal costs. One of the key differences between the Government’s costings and those produced by Oxford Economics is the assumptions around additional visitor numbers, with the OBR estimating that VAT-free shopping could bring in 50,000 to 80,000 additional visitors and the industry commission report suggesting 1.6 million additional visitors.

[Lord Livermore (Lab)]

My Lords, major UK tourist attractions last year saw 38 million fewer visitors than in 2019—a 23% fall—suffering first from lower international tourism because of the pandemic and then lower domestic tourism because of the cost of living crisis. Many of the UK’s seaside towns, already neglected, and with tourist spending in long-term decline, have suffered particularly badly. I ask the Minister what steps the Government are taking to support the regeneration of our seaside towns.

[Baroness Penn (Con)]

The noble Lord makes an important point. We have taken steps during the pandemic to provide support for those towns that rely on tourism; £37 billion of support went to tourism, leisure and hospitality in the form of grants, loans and tax breaks. We have the tourism recovery plan, which is focused on both international visitors and domestic tourism within the UK. We also have the towns fund, which is specifically focused on helping regenerate towns, including many of the seaside towns that do not tend to benefit from the bigger-city deals.

[Lord Lee of Trafford (LD)]

My Lords, last week, as president of the Association of Leading Visitor Attractions, I received an email from Dr Julia Knights, the deputy director of the Science Museum, who wrote:

“It is devastating to see so few schoolchildren now visiting the Science Museum from France and Germany especially.”


Could the Minister urge our trusty and well-beloved Home Secretary to again press the accelerator, but this time to urgently expedite the visa passport situation for visiting European schoolchildren and, similarly, to urge the Chancellor of the Exchequer to man up and admit that the VAT refund policy needs to be reversed, and do it now and not wait until the Autumn Statement.

[Baroness Penn (Con)]

I am not sure that the reversal of the VAT refund scheme would encourage more schoolchildren to visit the Science Museum. But I will certainly take back the noble Lord’s point about visas to the Home Office.

[Lord Hannan of Kingsclere (Con)]

My Lords, there seems to be a discrepancy between the Treasury figures quoted by my noble friend the Minister and almost every independent survey, including the one referred to by the noble Earl, Lord Clancarty. There is a persistent pattern of the Treasury refusing to take into account the secondary, more dynamic impact of taxes—the way in which lower rates can generate more economic activity. Does my noble friend the Minister think that it might be time to revise the way in which the Treasury does these forecasts, to take account of our observed experience?

[Baroness Penn (Con)]

As I have said to noble Lords, the Treasury took into account a wide range of information when reaching its decision. Indeed, the Treasury was judicially reviewed on the decision to withdraw the VAT RES scheme in Great Britain and successfully defended it, with the judge noting the thorough government analysis. As more evidence and data emerge in this area, we will of course keep it all under review.

[Lord Watts (Lab)]

My Lords, perhaps the Minister could give us two figures. What has been the increase or decrease in VAT since this change took place, and what has been the increase and decrease of sales in duty-free shops?

[Baroness Penn (Con)]

It is difficult to disaggregate the impact of this policy versus the overall take of VAT, which will be affected by a wide range of economic factors during this time. When we think about the tourism sector, we must remember that China represents a large number of visitors to the UK and China opened up only at the beginning of this year. Based on that, we hope to see a stronger recovery this summer, compared with previous summers.

[Baroness Wheatcroft (CB)]

My Lords, it is not the number of tourists that is important but the type of tourist. The higher-spending tourists are being deterred from coming to this country because of the lack of VAT-free shopping, as the figures quoted by the noble Baroness, Lady Doocey, made clear. Those tourists are heading to Spain and France and spending their money there. I declare an interest as chairman of the Association of Leading Visitor Attractions. Our members are losing out because these high-spending tourists are not coming to this country, doing their retail therapy and then taking in museums, galleries et cetera. Will the Minister undertake to take into account our cultural heritage when she looks at this issue?

[Baroness Penn (Con)]

I do absolutely appreciate the point that the noble Baroness is making. As part of the research that we did in considering this question, HMRC surveyed VAT RES users and the scheme did not make the top 10 in their list of reasons for visiting Britain—and that was for the 8% of visitors who qualified for the scheme who actually used it. We also asked them whether they would continue to purchase in the way they had previously. Two-thirds of those surveyed said that they would have purchased the same items regardless of the scheme, and 95% of people said that they would still shop. I appreciate that there is a wider impact, but we considered that when taking this decision.

[Baroness Foster of Oxton (Con)]

My Lords, tourism in England generates £106 billion to the Treasury and underpins 2.4 million jobs. I could never understand why we stopped encouraging people and businesses with the VAT situation and when they were in-bound at airports. I ask my noble friend seriously to reconsider this. Why we would wish to encourage tourists to shop and holiday in different countries around Europe and around the world when we have the greatest capital city on the planet is beyond me.

[Baroness Penn (Con)]

My Lords, the Government are a strong supporter of the UK’s tourism industry and absolutely recognise the contribution that it makes to our economy. As I said earlier, we previously surveyed users of VAT-free shopping. Fewer than 8% of non-EU visitors used it and, for those who did, it was not in their top 10 reasons for visiting the UK. There are many great reasons to visit our country and we will continue to promote and advocate them to people across the country and across the world.