Question to the HM Treasury:

To ask the Chancellor of the Exchequer, what estimate his Department has made of the potential cost of extending the VAT Retail Export Scheme to countries in the EU from 1 January 2021.

The Government has announced that the VAT Retail Export Scheme (RES) will not be extended to EU visitors, and will be withdrawn for all non-EU visitors, following the end of the transition period. However, retailers will continue to be able to offer VAT-free shopping to non-EU visitors who purchase items in store and have them sent direct to their overseas addresses and this will be available to EU visitors following the end of the transition period.

In 2019 HMRC estimate that VAT RES refunds cost around £0.5billion in VAT for around 1.2million non-EU visitors. HMRC also estimate that fewer than one in ten non-EU visitors use the VAT RES.

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 £0.9billion. 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 £1.4billion per annum.

The final costing will be subject to scrutiny by the independent Office for Budget Responsibility and will be set out at the next forecast.