The Long View by Vogue Business: How the UK redrew Europe’s luxury map

This article is part of our Advanced Membership package. To enjoy unlimited access to The Long View from Vogue Business and bi-monthly Market Insights Reports and webinars, sign up for Advanced Membership here. It was a decision that baffled luxury brand executives. In 2021, the UK government announced the end of its VAT retail export scheme (VAT RES) for tourists, meaning visitors would have to start paying the tax on goods bought in the country and taken home in their suitcases. The scheme was too costly, the government argued, and only really benefitted those operating in London. Two years on — after much lobbying from brands and their representatives and one failed attempt to reinstate the scheme — members of the British parliament came together to discuss the impact on the economy. The debate was triggered by a campaign led by Sir Rocco Forte, the chairman of Rocco Forte Hotels, which was supported by the CEOs of 350 companies, including Alexander McQueen, Victoria Beckham, Burberry, Mulberry, Liberty London, Harrods and Harvey Nichols. In the run-up to the debate in the House of Commons on 7 September, several companies released data that unanimously showed one thing: the way luxury shoppers are spending in Europe has changed dramatically since the scheme was scrapped. The UK’s policy move isn’t the only factor — Chinese travellers have made a reappearance after the reopening of its borders at the start of 2023, for example — but it is, arguably, the biggest. “As the world steps out from behind the pandemic, travel is resuming at pace from abroad, including Asia and Europe,” says Andrew Keith, CEO of Selfridges. “Creating attractive high streets and environments for UK tourism for the long term should be a priority for the government and tax-free shopping is a powerful growth driver for the economy, which we urgently need.” Brian Duffy, CEO of Watches of Switzerland Group, notes that the sales in the UK to clients claiming VAT back accounted for around 21 per cent of the group’s revenue in 2019. “Quite meaningful, in other words,” he points out. Mulberry, meanwhile, has been forced to close its Bond Street store due to the drop in footfall from tourists. “The harm being done to British brands, retail and hospitality as a result of the lack of tax-free shopping for tourists is significant,” says Thierry Andretta, CEO of Mulberry. “If we are going to be able to get the UK economy back to growth, we need a level playing field with Europe as currently we simply cannot compete with Paris, Berlin and Milan all benefitting at our expense.” “This is not just about shopping tourism — this is about restaurants, hotels, live entertainment and museums, as well as about job creation,” he continues. “We need the government to look at the data that illustrates the broader effect that tourism has on the British economy and to reinstate tax-free shopping for tourists as a priority.” However, with no guarantee that the government will pay heed to retailers’ pleas, the question is: what next? Many brands have already shifted their strategies, diverting marketing and retail spend away from the UK towards its European neighbours. Meanwhile, alternatives to the tax-free shopping scheme have been proposed. Forte says it’s not enough. “At a time when we are desperate for economic growth, a U-turn on this policy is urgently required,” he argues. “We now know that reintroducing a VAT rebate scheme would boost visitor numbers to the UK by 2 million a year — the UK simply can’t afford to go on driving these tourists into the arms of our rivals. As long as we leave the tourist tax in place, Paris, Milan and Berlin can’t believe their luck.” Redrawing Europe’s luxury map Data from multiple sources appears to back up Burberry chair Gerry Murphy’s view that the UK’s decision is a “spectacular own goal”. Tax-free shopping company Global Blue and the Centre for Economics and Business Research (CEBR) estimate that the tax is discouraging 2 million foreign visitors from spending money in the country each year, wiping an estimated £9.1 billion from the UK’s GDP in 2022 and £10.7 billion in 2023. This could result in the loss of as many as 172,000 jobs in 2022 and 201,000 in 2023, the research shows. An analysis by the UK’s Treasury department in 2022 estimated that reintroducing a VAT-free shopping scheme would come at a fiscal cost of around £2 billion per year. Industry-commissioned analyses have reached different conclusions. Part of the problem is that it’s impossible to accurately predict how many people would return to shopping in the UK if the scheme was reintroduced. Oxford Economics estimates it in the region of 1.6 million, for example, while the Treasury says it’s likely to be closer to 50,000 to 80,000 — a small increase considering the UK welcomed 40 million visitors in 2019. France has been the biggest beneficiary of the UK’s VAT charges, data from Global Blue and CEBR, and separate research from payment company Planet, which manages VAT refunds, shows. Global Blue says France’s share of tax-free shopping in Europe jumped from 25 per cent in 2019 to 34.1 per cent in 2022. Planet’s data shows that France’s tax-free sales are 63 per cent higher year-to-date than they were in the same period last year. The UK used to be the second-largest market for tax-free shopping spend in Europe. That position is now taken by Italy, with a 17 per cent share, per Planet. Spain is next at 10 per cent. Burberry is among the brands to report that the recovery from the Covid-19 pandemic was much stronger in Paris, Milan and Munich, than in London. “If it continues its trajectory, France will have half of Europe’s tax-free business in the next couple of years,” says Gary Byrne, president of tax-free Middle East and Asia at Planet. “America has rediscovered its appetite for travel and luxury goods, and Paris, with its association with high-end fashion brands, is drawing these consumers to France. In fact, the capital accounts for over 80 per cent of all tax-free sales across the country,” he adds. In the House of Commons, MP Geoffrey Clifton-Brown — who secured the debate — pointed out that there has been a knock-on impact on hospitality, culture, leisure and manufacturing. For example, in its annual report, the Dorchester hotel group reported that its Paris hotel was overperforming and its London one was underperforming as a direct result of the end of tax-free shopping. The Royal Opera House, Shakespeare’s Globe, West End theatres and Rank casinos have all publicly criticised the ending of tax-free shopping, he added. Harrods managing director Michael Ward agrees: “The British luxury brands who manufacture up and down the country are feeling the impact of shoppers choosing to spend more on French brands in Paris or Italian brands in Milan instead of British-made goods. Hotels, restaurants, theatres and museums are also all noting the absence of international shoppers,” he says. Changing travel patterns In 2019, before Covid hit, Chinese shoppers were at the top of the list of visiting nations for France (27.4 per cent, per Global Blue), the UK (27.3 per cent) and Italy (29.1 per cent). That changed as China shut down its international borders, and the top slot was taken by the US as favourable currency exchange rates sent Americans flocking to Europe. Planet data for 2023 shows a quick rebound in Chinese travel, however; year to date, China has risen back up to the second slot for the number of tourists visiting both France and Italy (the US is still in the top slot). But, while Chinese travellers are flocking back to Europe, a separate survey carried out by Global Blue reveals that the UK currently ranks as Chinese tourists’ least favourite destination to visit in the next 12 months out of a total of five (the others being France, Italy, Spain and Germany). In 2019, it was number two. “In recent years, we’ve observed a notable shift in Chinese travellers’ shopping preferences. The removal of the VAT refund scheme has played a significant role in this trend,” says Antonello Germano, China luxury analyst at Daxue Consulting, a consultancy specialising on the Chinese market. “Its absence has made shopping relatively more expensive, particularly for luxury goods. Economic factors, including a slowdown in China’s economy and inflation in the UK, have also contributed to changing consumer behaviours.” “World-famous department stores such as Selfridges and Liberty, as well as the luxury brands along Regent Street and Bond Street, rely on international visitors from China, India, the US and the Middle East,” said MP Nickie Aiken during the debate. “I highlight visitors from those countries and regions because visitors from those areas spend on average 60 per cent more than EU visitors. But, of course, we are also currently disincentivising visitors from both outside and inside the EU.” She continued: “Visitors from India and the Middle East consistently list shopping as the number one reason for visiting London, according to [the UK tourist board] VisitBritain. Visitors from those areas also state that the tax rate is a consideration when they decide where they wish to travel and how much they are willing to spend when they travel.” Loopholes and alternatives In the House of Commons debate, Treasury financial secretary Victoria Atkins pointed out that the VAT RES is still available for all non-UK visitors who purchase items in store and have them delivered to their overseas address. It also applies to overseas shoppers who buy online and have items delivered. Since the scrapping of the VAT refund policy, some luxury retailers confide that they have had to apply discounts to keep their loyal customers or that they would arrange for goods to be sent to other stores in other countries — often in France, Monaco and Italy — where their clients could complete their purchase and reclaim the VAT (which is 20 per cent in the UK across all luxury categories except children’s clothing). Discount practices have weighed on the balance sheet, while the transfer of merchandise has resulted in a loss of sales in their UK-based businesses, but it’s deemed worth it to preserve the relationship with top-spending clients. A salesperson at the London store of a multinational jewellery house says that, while in the past foreign shoppers used to buy in the UK and would collect their purchases on their way back home, since 2021, they visit their salesperson in the UK but the store arranges for the goods to be picked up in Paris, Milan or Monaco. “I keep the relationship, which is key, and I get a cut on the sale.” Watches of Switzerland’s Duffy says has increased marketing activity with local clients to help offset some of the negative impacts of the removal of the VAT refund. Nevertheless, he observes that some British clients are travelling to Europe to purchase tax-free. In an interview with Bloomberg, Burberry’s chief financial officer, Ian Brimicombe, said his company is in talks with the government to secure other forms of incentives — cash, vouchers, credit — which could lure back tourists. Burberry declined to comment further on the talks for this article. Harrods has looked to exclusive collaborations and products in the hopes of tempting international shoppers to spend. “No tax-free shopping is a major disadvantage in the competition to attract high-spending international visitors. To counteract this disadvantage, we have increased our focus on creating, in collaboration with our brand partners, unique experiences, such as the spectacular immersive experience with Louis Vuitton at the start of the year and the incredibly popular Prada Caffè, which has been delighting customers,” says Harrods's Ward. “Together with being able to offer rare and exclusive items that cannot be found elsewhere, we are working hard to continue to pull visitors to Harrods despite the tax advantages that shopping elsewhere may offer.” At an impasse The government isn’t budging. In an interview with LBC Radio in July, UK prime minister Rishi Sunak defended the current VAT policy, which he implemented when he was chancellor of Boris Johnson’s government. Sunak insisted that the VAT rebate benefits a small portion of businesses predominantly located in London. During the debate on 7 September, Atkins said it would be wrong to assume that shoppers get the full 20 per cent back on the VAT refund, because “companies processing refunds, who are sometimes the retailers themselves, charge significant administrative fees for the service”. She added that one-third of VAT RES users surveyed by HMRC were charged more than 50 per cent of their refund in fees, and the average was 36 per cent, so the savings to the consumer may be “far less” than the 20 per cent rate of VAT. Atkins also noted that VAT is the third most productive tax in the UK and that the government is continuously approached to scrap it from certain categories for various reasons. Meanwhile, the government-sponsored VisitBritain and GREAT campaigns are expected to attract 37.5 million visits to the UK, which is 92 per cent of 2019’s level. However, organisations including the CEBR insist that reinstating the traditional VAT-free shopping scheme for tourists would yield a net benefit for public finances. While businesses have weathered the negative impact as much as they could and are offering alternatives, the consensus is that bringing back the VAT rebate would be the best solution. “We are committed to ensuring that the UK remains an attractive place to visit and committed to supporting our retail sector,” said Atkins during the debate. “Nonetheless, the chancellor is clear that being responsible with the public finances is a key priority. In that regard, VAT RES would subsidise a large amount of tourist spending that already occurs, arguably, without a tax relief in place. But, we very much want to listen to industry and support long-term sustainable growth, so we will continue to receive evidence and keep the policy under review.” Key takeaway: Luxury retailers in the UK are going up against government officials in a bid to win back the VAT retail export scheme. Data shows the end of VAT RES in 2019 has driven tourists — especially from America and China — to divert their travel spend to Paris, Milan and Berlin, with France benefitting the most. Government officials say the scheme is too costly and skewed toward London to be worth reinstating. But, with British retailers, brands and other hospitality businesses in a losing battle for foot traffic and tourist spending, the debate looks set to continue. To receive the Vogue Business newsletter, sign up here. Comments, questions or feedback? Email us at feedback@voguebusiness.com.

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