Members of the House of Lords have joined several luxury watchmakers and retailers in voicing their concern over the UK government’s plans to end value-added tax relief for overseas visitors.
In reviewing the proposal to withdraw the VAT refunds for non-EU visitors starting next year, Lord Ed Vaizey cited analysis by the Centre for Economics and Business Research showing that the reform would put 128,000 jobs under threat and could see a fall of £6bn in retail sales, as well as cost the Treasury £3.5bn. “If the scheme is kept and extended to EU visitors it could create 20,000 jobs and generate £1bn of retail sales,” he said at a House of Lords session last month.
Lord Darryl Leigh in turn observed that “the highest 1 per cent of spenders spend an average of £60,000, saving themselves £12,000. Those people will choose to go to cities other than London, such as Paris.” Lord Denis Tunnicliffe pointed out that if the reform goes ahead, the UK will be “the only country in Europe not to offer tax-free shopping to international visitors”.
Since September’s announcement of the withdrawal of what the Treasury calls a “costly relief” scheme, Value Retail — which runs the Bicester Village retail outlet in Oxfordshire — has reported an increasing number of calls from tour operators asking which other countries the company does business in. “Global travel and tour operators have made it clear to large retailers that they are already looking for alternative destinations for their customers where they can shop more economically,” says James Lambert, vice-chairman of Value Retail. “Paris, Italy and Germany, for example, all offer VAT returns on purchases. Bicester Village, the West End of London and luxury stores like Selfridges and Harrods will be affected, but so too will the regions. Between them, Edinburgh, Glasgow, Manchester, Leeds and Liverpool attract £225m in spending from tourists.”
Moreover, according to Peter Harrison, chief executive of Emea at Richard Mille, the effect on those West End businesses will be felt across the nation in ways that are not immediately apparent. “It’s like saying the end of coal mining affected just a few towns in Wales and Yorkshire,” he says. “That is a myopic view. A lot of the properties up and down Bond Street and around Mayfair are owned by British pension funds and what’s going to happen next is people like me are going to say ‘London is not so important anymore, so that triple-A address is not as valuable anymore, so I’m going to pay, say 40 per cent less rent, because that is how much my business has dropped’. Less rental income means the building is less valuable and that will affect the much broader population in the UK when they find that the pension funds don’t have as much money to pay out.”
Brian Duffy, chief executive of the Watches of Switzerland Group, agrees. “Rents in London are among the highest in the world but worth it because of the incredible tourist traffic,” he says. “The government at a stroke will trap retailers in rents that are totally unjustifiable without tourist sales.”
The planned withdrawal of VAT-free sales from next January came as a totally unexpected shock for Mr Duffy. “Our experience and further evidence from recent surveys confirms that with no VAT-free shopping, fewer tourists will come and of those who do will have a significantly reduced expenditure,” he says, adding that such a measure would be a further blow to the retail, hospitality and entertainment sectors already reeling from the effects of the pandemic.
Nor does he see the problem as confined to the West End of London. Watches of Switzerland sells to visitors to such centres as Edinburgh and York as well as to Asian students studying in Manchester.
Moreover, there are the smaller regional retailers to be considered. Charlie Pragnell, managing director of the eponymous third-generation watch retailer and sixth-generation jewellery manufacturer based in Stratford-upon-Avon, has expanded his business to include a Mayfair showroom.
He makes half of the business’s £60m turnover in Stratford, much with repeat visitors who come from overseas for the Shakespeare season. Last year in London, he made two sales of jewellery crafted in Leicestershire workshops worth over £1m each, both to clients living overseas. “If the UK becomes less attractive to shoppers, top customers like that may go elsewhere.”
He feels that the Treasury’s shop-and-ship proposal — which would retain VAT-free sales for goods posted to overseas addresses — demonstrates the government’s naivete when it comes to the high-end watch and jewellery business, for which Pragnell received a Queen’s Award for Enterprise in 2018. “It is very expensive to ship high-value goods and there are insurance issues,” he says. “You could always charge the customer, but that’s not competitive with other places that don’t need to do that. The other issue is that most people who spend a lot of money want to leave with the goods there and then; there’s a feeling of comfort and security.”
The Treasury said that “around 92 per cent of visitors to the UK do not use the VAT retail export scheme and extending it to the EU [as the UK leaves the bloc] could increase total costs up to £1.4bn a year.” It perceives the scheme as “a costly relief which does not benefit the whole of GB equally, with current use of the scheme largely centred in London”.
It added that VAT-free shopping would still be available for goods sent directly to overseas addresses — including ones in the EU — although retailers argued this meant that in practice there would be no need to travel to the UK.
Scrapping the VAT refund scheme is not expected to affect the overall business of the larger global brands, however. “It does not make a huge brand difference,” says Jean Christophe Babin, chief executive of Bulgari. “But it penalizes UK economy and it makes the UK less attractive as a destination when we think about the global market for attracting tourist revenue. The fact that London will become less competitive against Paris or Milan is not good news for British retail. The disadvantage is clear but I don’t see so many advantages.”
He says the UK government is “mistaken” if it reckons it will receive more tax revenue. “Many of the foreign tourists buy [when travelling] because it is cheaper. If they compare with tax-free prices [in Paris] at Galeries Lafayette or Charles de Gaulle [airport] they will prefer to shop there; it will not be a gain for the UK government as they will shop less.”
Michael Ward, chief executive of Harrods, fears that Mr Babin will be proved right. “Pricing is very sensitive across Europe and people choose where they shop,” he says. “Our sweet point in watches is in the £10-25,000 range and making a saving of £2000 is a relatively straightforward choice.” He also fears for the impact on other luxury goods, from Scottish cashmere to Northampton-made shoes. Mr Ward says a previous consultation on the VAT refund scheme did not make any mention that it was to be withdrawn. “We all thought that it would be around how we put an electronic system in place,” he says. “I think that, if I am being generous, the consultation process took place while most businesses were closed down during Covid and I don’t think the government understands the elasticity of demand in the luxury goods sector.” But however generous Mr Ward is being, he is plain-spoken about the consequences. “We have been told by the major luxury brands that if this goes through, they will not invest in London.”
But Mr Duffy feels there is still time to act. “It will push many over the edge of financial viability and result in store closures and increased unemployment. There will be knock-on effects on construction as retailers pull back on investment. It will have repercussions throughout the UK, particularly in tourist destinations like London and Edinburgh but honestly all cities. We are hopeful that the government are listening to the tsunami of feedback.”
According to Lord Vaizey, the chancellor is currently receiving feedback from worried MPs. “It is a surprising own goal from a remarkably sure-footed chancellor. I know there are lots of MPs concerned about this, not just in London, and I hope that we can have a dialogue with the Treasury.”
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