Duty Free Allowances

(asked on 17th December 2020) - View Source

Question to the HM Treasury:

To ask the Chancellor of the Exchequer, what assessment has he made of the effect of the removal of the (a) VAT Retail Export Scheme and (b) tax-free airside shopping on the tourism sector within London.


Answered by
Kemi Badenoch Portrait
Kemi Badenoch
President of the Board of Trade
This question was answered on 13th January 2021

HM Treasury ministers have responsibility for tax policy.

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- The VAT Retail Export Scheme (RES) in Great Britain will not be extended to EU residents and will be withdrawn for all passengers.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 industry stakeholders to hear their views and received 73 responses to the consultation. The Government is also continuing to meet and discuss the changes with a variety of stakeholders, including other Government departments, 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.

The concessionary treatment on tax-free airside sales currently affects airports that fly to non-EU destinations. The extension of duty-free sales to EU bound passengers will be a significant boost to all airports in England, Scotland and Wales, including smaller regional airports which have not been able to offer duty-free to the EU before.

On 25 November the independent Office for Budget Responsibility (OBR) set out their assessment of the fiscal impact of the withdrawal of the tax-free schemes.

Factoring in a higher-than-usual elasticity of 1.9 to account for spending on luxury goods, the OBR estimate that the withdrawal of the VAT RES will result in a significant direct Exchequer saving of around £400 million per year, once passenger numbers recover from the impacts of Covid-19. Based on the 1.2 million users of the scheme who received a refund in 2019, this includes an assumption that approximately 20,000 – 30,000 fewer tourists visit Great Britain a year. That is 0.07% of the 40 million visitors to the UK in 2019.

The OBR estimate that the withdrawal of tax-free airside sales will raise approximately £170 million per year for the Exchequer, after behavioural responses are taken into account and passenger numbers recover from the impacts of Covid-19.

The OBR also looked at this package in the round when assessing the indirect impact on the economy – including the effects of extending duty-free sales – alongside the substantial support provided to the economy and retail industry.

The Government also recognises the challenges the aviation sector is facing as it recovers from the impacts of Covid-19 and has supported the sector throughout the pandemic, and continues to do so, including schemes to raise capital, flexibilities with tax bills, and financial support for employees.

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