British retailers brace for the end of tax-free shopping

For London’s luxury retailers, the news came as a bombshell. The British government announced in September that it is planning to scrap tax-free shopping when the UK leaves the EU in January. Fashion industry representatives say the move could deliver a hammer blow to London’s status as a fashion shopping capital. “You are sending a negative message globally, aren’t you?” says Julian Dunkerton, CEO of Superdry. “If you are allowing the rest of Europe to have that advantage over you, it’s a pretty naïve thing to do.” Most observers had been expecting that the UK’s departure from the EU would lead to the government extending tax-free shopping to include European Union tourists. Instead, citing fears of increased fraud from the UK’s 3.7 million EU nationals and the expense of including them, the government has decided to remove the benefit entirely. Unless ministers quickly backtrack, tourists from both the EU and worldwide will not be able to claim back 20 per cent of the price of luxury goods purchased in the UK as of January. Brands, analysts and opposition politicians all view this as bad news for British retail, arguing that high-spending tourists will instead plump for the significant discount on luxury goods available elsewhere in Europe. Shortly after the announcement, the French government lowered the minimum payment needed for a VAT refund from €175 to €100. The UK Treasury, by contrast, claims that a minority of tourists travel to Britain for shopping alone and that only London and outlet store Bicester Village really benefit from the scheme. Testing out that theory is a scary concept for luxury retailers, desperate for high-spending international tourists to return to their city-centre flagships. “At the moment, there are over 250 flagship stores in the West End, either UK flagships or European flagships,” says Paul Barnes, chief executive of the Association for International Retail (AIR). “If we get rid of tax-free shopping and the visitors aren't there, you won't put your flagship store there. You'll move to Paris.” As soon as the plans were announced, AIR began a coordinated campaign against the changes, which has drawn the support of the British Retail Consortium and luxury lobbying organisation Walpole as well as a significant number of luxury brands. Tax-free shopping has long been a significant driver of luxury spending worldwide. The retail economies in Hong Kong and South Korea are reliant on their proximity to Chinese shoppers looking for a significant discount on their luxury purchases. While consumers are notionally supposed to declare these goods and pay VAT in their home country on return, few do. Price differentials between European shopping capitals have typically been marginal – although the falling price of the pound after the Brexit vote was judged to have brought a significant boost to tourism revenue in London. The removal of tax-free would make the UK the only European country where there is no scheme in place, with the exception of those that do not charge VAT at all. “People started re-booking tickets almost overnight to the UK when the pound dropped so if people know well in advance they cannot shop tax-free, they will obviously adjust their plans,” says Zuzanna Pusz, head of European luxury goods at UBS. Pusz forecasts that Burberry will be the global player most affected and may have to tweak its retail network. The overall impact on the luxury sector worldwide will be small as spending will simply move to brands’ other European flagships. Luxury goods analyst Luca Solca of Bernstein says: “The UK government must have better and more granular data than we do, but from my vantage point this seems a self-damaging move, playing against the broader British interests.” In a survey of nearly 5,000 international travellers by tax refund firm Global Blue in mid-September, 95 per cent said the changes mean they would spend less on their next visit to the UK, while 62 per cent said it would make them less likely to visit Britain at all. An extrapolation of these figures by the Centre for Economics and Business Research (CEBR) suggest there would be as many as five million fewer tourists spending £6 billion less and a loss of nearly 140,000 jobs. More conservative CEBR estimates, based on official UK data, suggest a lower drop of 1.2 million tourists. The UK Treasury disputes these figures, saying the forecast drop is four times the number of tourists that currently use the scheme. A spokesperson says, via email: “Around 92 per cent of visitors to the UK don’t use the VAT Retail Export Scheme and extending it to the EU could increase total costs by up to £1.4 billion a year.” The government argues that the 3.7 million EU nationals residing in the UK could also defraud the country by using their passports as proof of eligibility for tax-free purchases. They add that shoppers will still be able to claim back VAT if they agree to have their goods sent directly to their home address, although there is little evidence that luxury consumers will warm to this approach. Home shipping is already possible at Bicester Village, but, according to a source close to the company, of the seven million visitors there last year, not one person asked to have an item shipped to their home. The figures cited by the Treasury also obscure the fact that a significant proportion of tax-free spending is by a small slice of high-spending travellers. According to the CEBR, just 1 per cent of non-EU visitors account for 20 per cent of all VAT reclaimed spending, while the next 12 per cent account for a further 24 per cent. “The big thing that drives Chinese visitors is shopping, and they are very price-sensitive,” says AIR’s Barnes, “They may well come to Britain, but they will wait till they go to France to spend because everything is 20 per cent cheaper.” Brands whose primary retail presence is in the UK are certainly very worried. Simon Cotton, CEO of Scottish cashmere specialists Johnstons of Elgin, says that around a third of their UK sales are registered for tax-free, with that proportion rising to 50 per cent in city centres. Cotton says it is hard to say just how much that spend will be reduced, but he is estimating a two-third drop for internal purposes. Bespoke tailor Kathryn Sargent says she thinks that the discount is a major reason that many of her clients travel to the UK to pick up their suits in person. The revenue changes will have a “categorical” impact, says Ewan Venters, CEO of historic department store Fortnum & Mason. “We attract many high-value individuals to the UK, and the removal of tax-free shopping will have a significantly negative impact not only on our business, but the whole sector.” Vogue Business could not find a major British luxury brand supportive of the government’s move. A group of 16 high-end retailers, including Paul Smith and Charles Tyrwhitt, has written to the British chancellor Rishi Sunak asking him to change his mind. Thierry Andretta of Mulberry has described the move as “short-sighted”. International brands have added their voice to the condemnation. “At a time when the retail sector is already struggling with the impact of the Covid-19 pandemic, we should be making the UK as attractive a destination as possible rather than encouraging international travellers to go elsewhere,” says Francesca Bertoncini, general manager of Prada Northern Europe. Chanel declined to comment but highlighted its membership of Walpole, which has been heavily critical of the government plan. Walpole has suggested it might ultimately pose a risk to manufacturing jobs in the UK given the diminished retail revenue of many luxury players that have supply chains within the country. Early in October, the powerful Treasury select committee asked the government to produce a cost-benefit analysis of its plans. Both the Mayor of London Sadiq Khan and his opponent in the upcoming mayoral election have demanded a government U-turn. “British brands and buying UK should be a marketing message that we are giving out,” says Dr Lisa Cameron MP, chair of the All Party Parliamentary Group for Fashion and Textiles. “The sector has taken two hits already, with the impacts [of] Brexit and Covid-19. So why give it a third?” To receive the Vogue Business newsletter, sign up here. Comments, questions or feedback? Email us at feedback@voguebusiness.com. More from this author: Covid second wave: The knock-on impact of Europe’s lockdown How much more would you pay for a sustainable T-shirt? The reality of a no-deal Brexit

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