SIGN UP for our newsletter ✉️ :

Get the latest stories delivered straight to you

What is the ‘tourism tax’ said to be damaging London’s economy and how could it change?

Rishi Sunak is being urged to bring back VAT-free shopping for overseas visitors (Stefan Rousseau / PA Wire)
Rishi Sunak is being urged to bring back VAT-free shopping for overseas visitors (Stefan Rousseau / PA Wire)

The axing of VAT-free shopping, making purchases in the UK 20 per cent more costly for international visitors, will impact this year’s London Fashion Week.

The loss of duty-free shopping, according to independent designer Edeline Lee, who established her namesake brand in 2013 and creates all of her clothing in the UK, makes it more challenging for small British businesses to compete with their European competitors.

Lee isn’t alone; many designers have come forward with the same complaint.

Laboni Saha, the founder of womenswear brand L Saha, is finding it “increasingly challenging to remain profitable from sales in the UK” as the cost of running a business increases with “Brexit-related costs and inflation”.

A recent study by the Centre for Economics and Business Research (CEBR) has revealed that the “tourist tax” is costing the UK £10.7 billion in lost GDP and putting off two million tourists from visiting each year.

The research also showed that extra sales generated by reinstating VAT-free shopping for tourists would outweigh these losses.

Around 350 businesses have sent an open letter to the Chancellor, Jeremy Hunt, asking for the situation to be addressed, highlighting the fact that tourists are choosing to travel to and spend their money in cities that don’t have the indirect tax.

Earlier this year, Prime Minister Rishi Sunak had said he would listen to calls to scrap the “tourism tax” that critics say is damaging London’s economy.

The PM’s official spokesman said: “We are always happy to listen to the sector about their concerns and obviously we will respond accordingly.”

A debate on tax-free shopping for international visitors was held in Westminster Hall on September 7 but no decision has been made yet.

But how did the VAT refund for overseas visitors work before, why did the refund scheme end, and what can tourists and businesses expect from it in the future?

Here is everything we know.

How did the VAT refund for overseas visitors work?

Until January 2021, visitors to the UK from outside the EU were able to get a VAT refund on their shopping. VAT, which stands for value-added tax, is a 20 per cent sales tax charged on items in the UK. Non-EU visitors used to be able to present a VAT receipt at the airport to claim their refund. This scheme has since ended, though customers are still able to buy items VAT-free in-store if they send them directly to their homes overseas.

The VAT paid by visitors to the UK is different from how tourist tax works in other cities. For example, Manchester introduced a tourist tax in April, which charges visitors to the city £1 per night for hotels and similar accommodation. The hope is that this tourist tax could raise millions of pounds for the council, and that the money could be used to boost the tourism economy.

Prime Minister Rishi Sunak will listen to calls urging him to scrap the ‘tourist tax’ (Alastair Grant / PA Wire)
Prime Minister Rishi Sunak will listen to calls urging him to scrap the ‘tourist tax’ (Alastair Grant / PA Wire)

Why did the VAT refund scheme end?

The VAT refund scheme ended in 2021 after the UK left the EU, as part of a post-Brexit consultation about taxing items transported across borders for personal use.

Kwasi Kwarteng reintroduced the tax-free shopping scheme as part of his mini-budget, but Jeremy Hunt reversed the decision when he became chancellor, claiming it was unaffordable.

At the time, retail bosses described Hunt’s decision as a “hammer blow to UK tourism and the British high street”.

Mr Hunt argued that by not introducing a new VAT-free shopping scheme, the UK could generate more than £1 billion in 2024, and more in subsequent years, as reported by Forbes.

However, a report by the luxury trade association Walpole found that tax-free shopping generated more than £3 billion a year for the UK as well as wider economic benefits.

How might things change in the future?

London mayoral candidate Daniel Korski has proposed introducing a tourist tax on hotel rooms in London, in a scheme similar to the tourist tax in Manchester.

Mr Korski has proposed introducing a “£1 or £2” tax to raise extra funding for the Metropolitan Police.

He said: “There is a real sense there is not enough police on the streets. I don’t think £1 or £2 more on your hotel bill means you are going to go to Paris instead of London.”

Introducing a tourist tax was also proposed by the London Finance Commission, an expert body set up by London Mayor Sadiq Khan.

Meanwhile, hundreds of London firms are urging the Government to restore tax-free shopping for overseas tourists.