Duty on Shopping: UK Entry Points

Henry Smith Excerpts

Wednesday 6th September 2023 Commons Chamber

[Henry Smith (Crawley) (Con)]

I rise to speak as the Member of Parliament for Crawley, a constituency that proudly includes Gatwick airport within its boundaries, and as the chair of the all-party parliamentary group for the future of aviation, for which I declare an interest. It is in those roles that I have been determined to support the aviation, travel and tourism industries as they continue to recover from the covid-19 pandemic, and I call on the Government to introduce duty-free shopping on arrival at airports and international rail and ferry terminals in Great Britain.

Reinstating duty-free shopping for passengers arriving from Europe and significantly increasing inbound personal allowances upon Brexit proved popular, with a 45% increase in sales of duty-free items by UK passengers shopping overseas in our first year outside the European Union. However, British businesses and airports do not benefit from that. Passengers can spend their increased allowances abroad only at their point of departure. The introduction of duty-free on arrival stores at airports, ferry ports and international railway stations would repatriate those sales to Great Britain, crucially ensuring that British businesses are the main beneficiaries of the post-Brexit duty-free system.

I will highlight three main benefits: the effect on the recovery of the travel industry, the impact on British competitiveness, and the importance of choice and the passenger experience. On the first benefit, travel recovery and regional connectivity, I do not need to repeat to the House the full impact of the covid-19 pandemic on the aviation sector. As the sector continues to recover, we know that travel hubs need non-aeronautical revenues such as retail and duty-free. Indeed, as much as half of total airport income can come from those activities. All UK airports and international terminals will benefit from duty-free on arrival stores. The creation of new retail areas at UK airports would trigger significant capital expenditure for building works as infrastructure is adapted to take advantage of this new opportunity, resulting in further economic investment, including creating construction jobs for the duration of those projects. The increase in sales can be reinvested in new routes, improving passenger numbers and attracting more visitors, making London and regional hubs across the UK more competitive with rival cities such as Paris, Milan and Barcelona.

I draw the House’s attention to the example of Norway. Being a non-EU nation, Norway introduced duty-free on arrival stores in 2005 and there was an immediate impact on Aberdeen airport. Sales to Norwegian-bound passengers fell by 40%, with the average spend per passenger halving. The resulting growth on commercial revenues in Norway was invested in route development, which allowed it to attract new airlines by lowering charges. Norway now has the lowest aeronautical charges per passenger in the whole of Europe. More passenger growth, more income and more investment—all without the need for the Government to fund support.

The second benefit is the impact on global competitiveness. We know that more than 60 countries have now implemented duty-free on arrival, including most major travel hubs in Asia, the middle east and Oceania, as well as fellow non-EU countries. If the EU implemented arrival duty-free stores before we did, it would have a detrimental effect on British ports of entry. European Travel Retail Confederation modelling predicts arrivals duty-free gross value added boosts would be some €300 million for Spain, €190 million for Italy and €580 million for France. Such sales would have a devastating impact on UK port departure stores. However, the UK Government could get ahead and legislate for arrivals stores first, future-proofing the sector.

[Christine Jardine (Edinburgh West) (LD)]

I completely agree with the hon. Gentleman’s argument. My own local airport, Edinburgh airport, would benefit greatly from duty-free arrivals—not least because, as in quite a few international airports, passengers have to go through the shopping area to get out of the airport. Therefore, in some cases there might not even be the need for capital investment. Having experienced this in Australia, it is very tempting when we arrive in a duty-free area to buy duty-free, so there would be a huge incentive for people coming to this country to buy duty-free on arrival and benefit the local economy.

[Henry Smith]

The hon. Lady is exactly right; I have experienced similar when travelling to Australia or closer countries such as Switzerland. The boost that that gives to those local economies is quite significant.

In this country, however, we need to act quickly. Such a plan for arrivals duty-free is under active consideration by the European Commission as part of the directorate-general for taxation and customs union’s review into travel and tourism taxation. Introducing arrivals duty-free is the only way we would be able to level the field.

The third benefit is greater choice and passenger convenience. The modern passenger has come to expect the retail element of the travel experience. Duty-free purchases on arrival will contribute to a more seamless travelling experience. Arrivals shops are a separate market in competition with departure duty-free sales from airports abroad. The lack of arrivals duty-free is placing us at a competitive disadvantage.

Arrivals duty-free is not only convenient, but popular too: polling commissioned in 2022 found 45% of travellers regard carrying duty-free items back to the UK on their flight as an inconvenience. Polling conducted at several UK airports last year found that in many areas, including my own Gatwick airport, two thirds of people would support the Government introducing such stores.

Nevertheless, I am aware that there remain concerns among those on the Treasury Bench, and I am keen to address them. The first concern from His Majesty’s Treasury, I suspect, is the revenue implications for the Exchequer. Research from York Aviation predicts that such stores will result in additional sales of £100 million each year. An increased spend of between 20% and 30% per passenger is also anticipated. I therefore ask the Government to again look at the example of Norway, where, as of 2019, duty-free on arrival sales have increased by 108% since the policy’s implementation, and are growing consistently at an average rate of more than 10% each year.

In this scenario, the initial loss of excise duties for HM Treasury is quickly offset by other forms of taxation, in addition to new jobs. At Zurich airport, for example, the introduction of a single arrivals duty-free store meant an additional 50 jobs. For the UK, the increase in income tax and corporation tax is estimated to be an additional £50 million each year for the Exchequer. Even at the lowest levels of predicted sales, the impact on Government revenues is still likely to be only cost-neutral at worst. The policy would also increase sales on duty-paid categories.

The second concern that I suspect the Treasury has is about the impact on the domestic high street. Although I appreciate that concern, we need to be clear that the only competition to arrivals duty-free stores is from overseas departure duty-free stores. The introduction of the policy has the support of many brands that sell in the domestic market both on the high street and in travel retail channels. The size of the inbound duty-free market is less than 2.2% of the domestic market for the same products. Even if the policy were more successful than expected, any impact on the high street would be nominal. Passengers at an airport are drawn from a far wider catchment area than those in town centre stores, for example. To look again at examples from elsewhere, Switzerland and Norway have both had arrivals stores for over a decade, and neither has detected any impact on high street sales.

The third concern that I suspect the Treasury may have is about implementation. Let us be clear: in the model of arrivals duty-free stores proposed by the industry, arrivals stores would be located before customs clearance. That would avoid any additional staffing or resourcing pressures, and could provide a more robust level of control and oversight. Border Force and His Majesty’s Revenue and Customs would have the opportunity to observe and audit purchases using existing mechanisms, as they do now, and monitor inbound duty-free allowance limits. As a result of Brexit, only secondary legislation will be needed for implementation, so the change would not be burdensome on the busy schedule and agenda of this House.

Let me reiterate my support for sustainable aviation fuel more broadly, and for the wider aim of the aviation sector reaching jet zero—the commitment that UK domestic aviation will achieve net zero carbon emissions by 2040.

[Sir William Cash (Stone) (Con)]

Will my hon. Friend give way?

[Madam Deputy Speaker (Dame Rosie Winterton)]

Order. No. The hon. Gentleman has only just come into the Chamber. This is an Adjournment debate, and he should have been here from the beginning to intervene, as he knows.

[Henry Smith]

I did not notice my hon. Friend slink in behind me, but I am grateful for his moral support, Madam Deputy Speaker, even though by your order he is unable to vocalise it.

On my support for sustainable aviation, I was pleased to host and address a new industry alliance, Hydrogen in Aviation, just last night here in Parliament. The alliance is designed to help the UK lead innovation in that field. That would, along with duty-free on arrival, better support our sector. Aviation and our ports are vital for UK trade and employment. We can do this in a cleaner, smarter way, and duty-free arrivals can play an important part for the sector.

In closing, it is clear that the introduction of arrivals duty-free stores would support economic growth and provide a tiny boost to the recovery of aviation, travel and tourism from the pandemic. This plan would be funded by industry and would be at worst cost-neutral for the Exchequer. It is a low-risk policy that has already proven successful in some 65 countries around the world. There would likely be no impact on domestic high street sales, due to limited market overlap and differing customer behaviours in duty-free stores. By introducing duty-free stores on arrival, the Government can reaffirm their commitment to supporting the aviation, travel and tourism sectors, and the economic prosperity that they afford by providing employment to so many of my constituents, and to communities across the entire country. The policy is also popular with the electorate, so I hope that the Government will act swiftly to achieve this additional Brexit freedom.

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

First, I congratulate my hon. Friend the Member for Crawley (Henry Smith) on securing tonight’s important debate. He brings so much experience and expertise on this issue to the Chamber, not just through his chairmanship of the APPG for the future of aviation, but as the Member of Parliament for Gatwick. I thank him very much for that. I am conscious that people outside the Chamber may be watching the debate, so let me say that what we are discussing is duty on the sale of alcohol and tobacco, which would ordinarily attract UK excise duty and VAT. My hon. Friend advocates for the removal of that duty and VAT for passengers who have entered Great Britain from outside the UK before they have reached custom-controlled entry points. I will give some background on the Government’s duty-free policy, because it is an important part of the overall picture.

In January 2021, the Government extended duty-free sales to EU-bound passengers for the first time in over 20 years, which was a significant boost to airports and international rail terminals in Great Britain. That change meant that passengers travelling from the UK to the EU were able to purchase duty-free goods once they had passed security controls at ports, airports and train stations on international routes. They also became able to purchase duty-free goods onboard international transport routes from Great Britain. As my hon. Friend said, we understand that customers find it convenient to buy their products during the flight, or to order them in advance and pick them up at the end. We are pleased that the change in policy has been a boost for UK travel hubs; indeed, I watch with close interest to ensure that the tax savings brought about by this Conservative Government are passed on to consumers, because that is important. I hope that retailers watching the debate will note the Minister’s interest in their doing the right thing and ensuring that those savings are passed on.

When we made those changes in 2021, we said that we were not considering a similar policy for arrivals, for several reasons. First, as my hon. Friend has identified, there were serious concerns about the impact on shops in the UK, whether on the high street or closer to an airport. Duty-free on departure encourages purchases in the UK that might otherwise be made abroad. That case is less clearcut with regard to allowing customers to buy goods duty-free on arrival; that could create an unfair playing field for the domestic duty-paid retailers working either in the confines of the airport or station or beyond them.

The hon. Member for Edinburgh West (Christine Jardine) mentioned her local airport of Edinburgh. I am thinking of arrivals at Heathrow, where once a passenger has gone through customs, they are in the arrivals hall, and there are shops there selling products, as one would expect. I must confess that I have never tried to buy cigarettes or alcohol from those shops, so I know not what prices they would charge, but importantly, because they are on the arrivals side of the barrier, they have to charge duty and VAT on products. There might be only a few feet between those retailers selling products duty-free and others selling the very same products beyond the barrier, on the arrivals side.

Secondly, we would have to consider the need for adequate infrastructure and resourcing for the publicly funded Border Force, so that it could combat fraud, ensure compliance with requirements and enforce any charge at all entry points. In a moment, I will go into some of the duties that Border Force has at airports, but we must remember the enormous responsibility on those officers at travel hubs, and the range of offences and activities that they have to be alert to. As a former Home Office Minister, I would have to be very careful to understand how giving those officers extra responsibilities regarding the sale of duty-free alcohol and tobacco would be of wider benefit to the British public. Businesses would also need to put supporting infrastructure in place, which would be costly to them.

Finally, duty would of course be lost from those sales. We have considered very carefully the York Aviation report. My officials have briefed me on it, and we appreciate the effort that has gone into it, but we consider that the report falls into the error of overstating the size of any additional economic activity that would result from the proposal. We remain to be convinced that this change to VAT and duty policy would lead to a rise in sales of these products that would support the creation of many new jobs across the economy.

[Henry Smith]

Would Treasury Ministers be willing to meet industry representatives to discuss the concerns that the Minister is expressing about the impact of the policy change? Through such dialogue, we could probably find a solution that would alleviate fears across the board.

[Victoria Atkins]

I am very happy to meet my hon. Friend and representatives, but I must temper expectations. For a change to be made of this nature, the economic case for the entire UK economy would have to be very strongly made. He will appreciate that I receive many well intentioned suggestions on removing VAT—and other forms of tax, but particularly VAT—from products. Indeed, I think we are up to £50 billion-worth of suggestions since we regained our freedoms on leaving the EU. We have to be very clear as to the economic benefits, but I am always very happy to meet my hon. Friend.

The report also deals with the issue of jobs. Again, we remain to be convinced that, if jobs were to be created, they would be additional to the jobs already in place in the high street that involve selling alcohol and tobacco with duty and VAT charged, as they are obliged to be charged on the UK high street. I am afraid that we do not accept the report’s conclusions.

I will give my hon. Friend a little bit more detail on the broad objectives behind duty-free on arrivals. First, we are very conscious that the duties we charge on alcohol and tobacco serve not just an economic purpose, but the critical public health objective of trying to persuade people to stop smoking, or to smoke far less, and to have a healthy relationship with alcohol. Indeed, my hon. Friend will know of the very sensible changes made to the alcohol duty regime in the Finance Act 2023 to enable products with a higher strength of alcohol to be treated differently from products with a lower alcohol content. That was done because, as I think we all acknowledge, reflecting the strength of alcohol in the duty price is a way, we hope, of helping people to make decisions about their health. Our current duty-free-on-departure policy strikes a balance between those objectives and supporting international travel, but we would have to consider carefully whether duty-free on arrival would maintain that balance.

Secondly, we ask whether displacement would occur, and whether any losses would outweigh any indirect benefits of increased economic activity. Outbound duty-free for EU passengers alone is estimated to cost around £200 million per year, primarily through displacement of duty-paid high street sales to duty-free stores. The Chancellor has been clear that it is vital that we continue to act responsibly with the public finances, so the risk of eroding tax revenues is not one we will take lightly. Finally, there is also a compliance angle. The Government would have to put measures in place to mitigate the risk of increased illicit activity, which would require the diversion of Border Force staff from other crucial areas. That includes the priorities that we rightly set for them, including matters such as illegal immigration, drug smuggling, gun smuggling, terrorism, and other serious offences. That is why we must be very careful before contemplating adding to Border Force’s responsibilities, and its vital work of protecting the nation, day in, day out, and ensuring that the law is obeyed by those who travel overseas or into our country.

Of course we keep this policy under review. I would be happy to meet my hon. Friend to discuss it further, but we would need strong evidence to assure us that high-street duty-paid businesses would not be disadvantaged by a policy of duty-free on arrivals before we even considered any such changes. To reassure my hon. Friend, I asked my officials to pick up on the point that he raised about the EU contemplating changes to the system, and as far as we know, we do not believe that the EU is considering that. Of course, we will ensure that that information is up to date. I am told that as recently as 2021, the EU Parliament said that it was not considering that, but I appreciate that international politics change.

I reiterate the support that the Government have committed to the aviation industry—indeed, often at the behest of my hon. Friend during the pandemic. In May last year, we published “Flightpath to the future”, a strategic framework for the sector to build back better. Through it, we aim to make UK aviation cleaner, greener and more competitive than ever before. The framework explores key issues, including workforce and skills, connectivity, global impact, innovation and decarbonisation. I note with interest those parts of my hon. Friend’s speech concerning different types of fuel for the airline industry. That is the sort of work that we wish to help the aviation industry with and, more particularly, to develop in the UK as far as possible.

In conclusion, I thank my hon. Friend for his speech. I reiterate that we have considered this matter carefully, but we must prioritise our responsibilities for the public finances. That is why we do not feel able at this point to agree to the suggestion, but I am happy to keep the issue under review, and to meet him to discuss it further.

Question put and agreed to.