Tax-free shopping could contribute £350m annually to Treasury

A new report has revealed that the Treasury’s estimate of a £2 billion annual cost to reintroduce tax-free shopping in the UK is inaccurate, with the Treasury actually set to benefit by £350 million each year.

Commissioned by the Association of International Retail, the Oxford Economics’ report estimates that the real direct cost to the Treasury of refunded VAT would be £590 million, less than one third of HMT’s estimate.

The report highlights that the projected difference from the Treasury’s own figures is likely due to an assumption that the average value of refunds would be the same for both EU and non-EU visitors, as well as an overestimate in the total value of tax-free shopping refunds.

The measure would reportedly bring in an additional 1.6 million visitors in the first full year, spending an extra £2.1 billion. The total economic impact of the boost in foreign visitor numbers and spending across the country would be £4.1 bn annually.

While the direct cost is set to be £590 million, tax-free shopping is expected to generate additional economic activity worth £940 million in tax take, leaving a net positive impact to the Treasury of £350 million.

The report also suggests that because the additional spending is generated from international visitors, the estimated impact on GDP and tax take will be significantly higher than from a policy that incentivises UK spending.

Paul Barnes, Chief Executive of the Association of International Retail, said: “Today’s report strongly indicates that tax-free shopping will have a net positive impact on the UK economy, providing the Treasury with an additional £350 million in revenue, rather than costing £2 billion.

“At a time when the economy is facing a major downturn, and businesses across the country are looking for any opportunity to boost their income, we have an additional 1.6 million affluent visitors ready and waiting to flock to our shores and spend money in our shops, restaurants, hotels and tourist attractions.”

The Association of International Retail, alongside other leading industry figures, is calling on the Chancellor to request that the Office of Budget Responsibility (OBR) reviews the Treasury’s original estimates, so that the Government might make a decision based on full and accurate information as to the economic impact of tax-free shopping.

Barnes added: “We cannot afford to throw away a policy that would likely prove to be a huge financial lifeline for the livelihoods of countless hard-working British people, alongside the wider economy. We urge the Chancellor to ask for an independent review into the full economic impact of tax-free shopping, preferably by the OBR, so that a considered decision can be reached that is based on complete and accurate information.”

Since the Government ended tax-free shopping in 2020, Britain is now the only European country not to offer tax free shopping to international visitors.