Retail: What’s happening with the changes to duty-free shopping?

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Changes to VAT and duty-free shopping?

The UK government has announced changes to duty-free shopping and the VAT Retail Export Scheme that will come into effect from 1 January 2021.

VAT Retail Export Scheme

The VAT Retail Export Scheme, which provided for VAT refunds for overseas visitors buying in British shops, will end. Currently, non-EU visitors to the UK are able to claim a refund of the VAT on goods bought in the UK and taken home.

Overseas visitors will still be able to buy items VAT-free in-store and have them sent directly to their overseas addresses, but this means there will now be associated shipping costs and the customer cannot immediately make use of their purchases.

Duty-free Shopping

In addition, from 1 January passengers traveling from the UK to non-EU countries will no longer be able to buy tax-free goods such as electronics, perfume, or clothing at airports.

However, British passengers traveling to EU countries will be able to buy duty-free goods, including alcohol and tobacco products, in British ports, airports, and international train stations, as well as aboard ships, trains, and planes.

The allowance for duty-free alcohol, tobacco, and other goods brought in by passengers from non-EU countries will be increased and extended to EU countries.

Why the change?

The UK Government claims that the VAT Retail Export Scheme scheme is being removed because it is costly for HMRC to run. It also claims that the VAT is not always passed on to consumers at airports, putting high street stores at a disadvantage.

Is it a bad thing?

Retailers have expressed their concern to the Treasury that this is the wrong thing to do at the wrong time, and will have a seriously detrimental effect on the high street — claiming that overseas shoppers will simply go elsewhere or go online.

According to a report¹, the decision to end duty-free shopping will lead to 138,000 job losses and cost the economy £3.5billion — just at a time when retail and the UK travel industry are under tremendous pressure.

As the UK is expected to be the only country in Europe not to offer tax-free shopping to international visitors after 1st Jan, that feels like a serious threat.

What is the real reason — follow the money

As with most things in life, if you want to understand the reason why a decision has been made a certain way, you need to follow the money.

In this case, all EU visitors to the UK would be able to make use of the VAT Retail Export Scheme post-1st Jan. That’s an additional 6.9 million annual visitors³ who could now claim back the VAT — I suspect that’s what the Treasury wants to avoid.