Question to the HM Treasury:

To ask the Chancellor of the Exchequer, what assessment his Department has made of the effect of the decision to abolish VAT-free shopping on the UK's (a) tourism and (b) hospitality industries.

Ahead of the end of the transition period, the Government has announced the VAT and excise duty treatment of goods purchased by individuals for personal use and carried in their luggage arriving from or going overseas (passengers). The following rules will apply from 1 January 2021:

- Passengers travelling from Great Britain to any destination outside the United Kingdom (UK) will be able to purchase duty-free excise goods once they have passed security controls at ports, airports, and international rail stations.

- Personal allowances will apply to passengers entering Great Britain from a destination outside of the UK, with alcohol allowances significantly increased.

- The VAT Retail Export Scheme (RES) in Great Britain will not be extended to EU residents and will be withdrawn for all passengers.

- The concessionary treatment on tax-free sales for non-excise goods will be removed across the UK.

The Government published a consultation which ran from 11 March to 20 May. During this time the Government held a number of virtual meetings with stakeholders to hear their views and received 73 responses to the consultation. The Government is also continuing to meet and discuss with stakeholders following the announcement of these policies.

The detailed rationale for these changes are included in the written ministerial statement and summary of responses to the recent consultation: https://questions-statements.parliament.uk/written-statements/detail/2020-09-11/hcws448 and https://www.gov.uk/government/consultations/a-consultation-on-duty-free-and-tax-free-goods-carried-by-passengers. A technical note has also been issued to stakeholders to expand on this document and to respond to issues raised by stakeholders.

HMRC estimate that VAT RES refunds cost around £0.5 billion in VAT in 2019 for around 1.2 million non-EU visitors. In 2019 the ONS estimate there were substantially more EU visitors (24.8 million) than non-EU passengers (16.0 million) to the UK. This implies an extension to EU residents would significantly increase the cost by up to an estimated £0.9 billion. This would result in a large amount of deadweight loss by subsidising spending from EU visitors which already happens without a refund mechanism in place, potentially taking the total cost up to around £1.4 billion per annum.

The independent Office for Budget Responsibility (OBR) has today set out their assessment of the precise fiscal impact of the withdrawal of the scheme. Factoring in a higher-than-usual elasticity of 1.9 to account for spending on luxury goods, the OBR estimate that the change will result in a significant direct Exchequer saving of around £400 million per year, once passenger numbers recover from the impacts of COVID-19. This includes an assumption that approximately 20,000 – 30,000 fewer tourists visit Great Britain a year – far away from the hundreds of thousands or millions of visitors that others have claimed. Overall, the behaviour response with this higher elasticity is expected to reduce the tax revenue by a quarter.