VAT-free shopping debacle has sent tourists packing
Five years on from the demise of VAT-free shopping, retail and hospitality chiefs say the impact is still causing pain as the industry seeks change, writes Joanna Hodgson
Five years ago this month a change came in that might, on the surface , have prompted the average British shopper to get their smallest violins out: overseas visitors would have fewer incentives to buy designer goods in the UK.
Once a hugely popular perk, the ability for non-EU visitors to reclaim 20 per cent VAT on purchases ended under the Conservative government in January 2021 after Britain departed the bloc. Since then, a growing chorus of chief executives from upmarket retail and hospitality firms have sounded the alarm over how significant this decision to scrap VAT-free shopping was.
Paul Barnes, who leads industry body the Association of International Retail (AIR) says the return of tax-free shopping would provide a big boost to the UK economy. “It is one of the most important issues for tourism and Britain’s high streets.”
Now, with half a decade passed and no reprieve for the many companies that have called for the reinstatement of tax-free shopping, Barnes is making a fresh plea to the government for a review. At the same time a host of bosses today tell City PM the impact of the so-called ‘tourist tax’ is still very much visible, adding to other challenges in 2026.
When it comes to losses and gains from VAT-free shopping, estimates vary. The then government previously pointed out the scheme could deprive British taxpayers of around £2 billion a year and that it mainly benefits London. But numerous employers think the decision to axe VAT-free shopping was seriously unwise, and that it has encouraged well-heeled consumers to pursue retail therapy in other countries.
Helen Brocklebank, chief executive of luxury goods trade body Walpole, says a reversal of the previous government’s policy “could contribute billions to UK PLC and the exchequer by putting our cities back on a level playing field with our European neighbours”.
AIR last year said it estimates the UK lost around £2 billion of tourist spending in 2024 alone as non-EU international visitors diverted their money to France, Italy and Spain.
AIR has repeated its ask, in a new letter to the Chancellor after the Budget and before Christmas, for the government to make a commitment in the forthcoming National Visitor Economy Strategy to review the impact of tax-free shopping on the economy and the exchequer. The focus is on the potential that could come from having a new scheme, one that is open to all overseas tourists, including those from the EU, based on all new evidence of the actual impact on spending over the past five years.
The association has previously estimated a new scheme would generate at least £5.65 billion of additional foreign spending annually.
New initiatives could help build momentum after a turbulent few years for retail and hospitality. Footfall slumped during the pandemic, while costs have soared including from last year’s rise in National Insurance contributions. Higher costs from this April include for the National Living Wage, while business rates remain challenging.
Some luxury companies have reported encouraging trading, but brands insist the lack of duty-free shopping is holding back the extent of growth that could be achieved.
Sean Dixon, co-founder of Mayfair-based suit maker Richard James says: “Our Christmas trade was flat compared to the prior year which was better than we expected. We are told by existing clients that when they come to Europe they are more likely to bypass London for shopping and save money in other European cities.”
Brian Duffy, chief executive of Watches of Switzerland Group says: “While most of our UK business is driven by domestic demand, we’re seeing clear evidence that international visitors are choosing to do their Christmas shopping in European cities instead of London, Manchester or Edinburgh.”
Duffy thinks reintroducing VAT-free shopping is a win-win. “It’s a golden nugget for the government, a way to spur economic growth while supporting UK businesses.”
Luxury hotel tycoon Sir Rocco Forte agrees, saying that since the abolition of tax free purchases for tourists in 2021, “the UK has become the only major country in Europe which doesn’t offer VAT refunds to international visitors.”
Even for companies that have a big UK customer base and are less exposed to fewer international visitors, the ‘tourist tax’ feels like a barrier to the wider sector thriving. As Michael Wainwright, chairman of Boodles puts it, he was pleased with the jeweller’s Christmas performance but “obviously if we had VAT-free shopping it might have been better”.
Ros Morgan, chief executive of Heart of London Business Alliance says: “Britain’s high streets face mounting pressure from soaring business rates, employment costs, and a £1bn hit in 2025 as shoppers took advantage of tax-free shopping in the EU. The fix is simple: reinstate the VAT rebates offered to tourists for decades in the UK – a benefit still available to international visitors, including Britons, in every one of our European rivals.”
An HM Treasury spokesperson says visitors can still claim VAT relief where the items purchased are shipped directly to their home country as exports.
The spokesperson adds: “The UK is one of the most visited countries in the world with international tourism driving billions into our economy. We are supporting the continued growth of this industry, and the Government is working to meet our ambition to welcome 50 million international visitors a year to the UK by 2030.”
Many firms believe the government changing its tune around VAT-free shopping could help Whitehall meet those ambitions.