MPs endorse scrapping of VAT Retail Export Scheme

5 Feb 2021

MPs have rejected an SNP attempt to keep the VAT Retail Export Scheme. In a vote following a debate on Wednesday (3) they voted by 353 votes to 74 not to revoke the Travellers’ Allowances and Miscellaneous Provisions (EU Exit) Regulations 2020 (SI, 2020, No. 1412).

Proposing the motion to evoke, SNP spokesperson Gavin Newlands said that while his party fully support the extension of duty-free shopping for people travelling to the EU (also in the regulations), “the withdrawal of the VAT retail export scheme and the airside extra-statutory concession represents a real threat to thousands of jobs across Scotland and the UK.”

Newlands said that HMRC guidance on the measures stated the withdrawal “may have a marginal impact on retailers in Great Britain” this did not take into account the indirect impact on businesses outside the retail sector. “The supply chain considerations are completely missing from the HMRC statement, with not a word about the manufacturers and suppliers outside of direct retail that will find their bottom line impacted by the disappearance of RES as we know it.”

“Nor has HMRC shown itself to be entirely accurate in its understanding of the fiscal impact of abolition,” added Newlands. “Its technical note conflates the number of sales with the number of passengers, underestimating the use of RES by up to 75%. It focuses on the direct benefits to London and Bicester Village, ignoring the indirect impact on travellers from regional airports transiting to their final destination outside the EU, thus underestimating the demand for the extra-statutory concession at these airports. In short, the attempts of HMRC and the Treasury to justify their decision smack of a post facto race to find facts that fit their narrative, rather than a proper analysis of the pros and cons of both the retail export scheme and the extra-statutory concession.”

Conservative speakers

Conservative MPs enthusiastically supported the extension of duty-free shopping and mostly backed the scrapping of VAT RES.

Katherine Fletcher mused: “In the last 20 years, who has not wandered through an airport at 3 o’clock in the morning ready to go on holiday and sighed at the duty-free, thinking that it would be a wonderful thing to clink on to the plane with, so that we were all prepared at the other end when we got to the apartment… Great news: this is now possible.” She added that the measure also means the return of personal allowances, which will be roughly quadrupled. “In short, it means the return of the booze cruise, a long-lost institution that our proud nation has not been able to engage in.”

Natalie Elphicke, the MP for Dover, said she was “delighted about the return of duty-free and the opportunities it brings to channel crossings”. Like her colleague she took the opportunity to reminisce about ferry cruises in her younger days: “as a young woman there was perhaps nothing more exciting than putting on my dotted, spotted ra-ra dress and dancing across the sea on the ferry disco. As an introduction to exotic foreign climes, nothing could quite beat sashaying up and ordering one’s frites et mayonnaise at the chip van in France and Belgium.” A ferry trip is nothing less than a mini cruise, she concluded.

Miriam Cates supported the regulations and put the VAT RES change in the context of the need for a ‘fair and dynamic tax system’. “A fair tax system should not allow wealthy international travellers relief from local taxes, as if they simply arrive, make purchases and leave the UK again without any other interaction with our economy. Those visitors benefit from a vibrant and thriving UK economy, our infrastructure and our connectivity, and our economy relies on everyone paying their share of tax. We do not give VAT refunds for hotel rooms, meals or theatre tickets, so why should a handbag or new coat be treated any differently?”

Jacob Young focused his remarks on the return of duty-free, which he welcomed, and claimed that Labour councils had neglected Teesside Airport. On VAT RES he said he understood the concerns “but I disagree with them. It was a hugely expensive scheme that really only benefited wealthy areas of the UK. No one shopping on the high streets in Redcar or Marske would benefit from it.”

Anthony Browne welcomed the measures. On the return of duty-free he said that, when, a few years ago, he was asked by The Sun to come up with some ideas for any possible benefits of Brexit, the return of duty-free was one of them. “It is a tax break that may not be that economically efficient on traditional measures, but is really popular and great fun. It is a tax break for the many, not the few.” The Treasury should use not a benefit-cost ratio, as it normally does, but a fun-cost ratio, he suggested. He supported the abolition of the retail export scheme for two reasons: “first, it is not good value; and secondly, it is not fair.” “There are far better ways to save jobs, create jobs, help the high street and help retail than to give a tax break to wealthy tourists buying high-value goods,” he concluded.

Duncan Baker said that the unsnappy title of the statutory instrument should not hide the importance of a useful piece of legislation. “As a former finance director with the unenviable joy of filling out VAT retail export scheme paperwork, I can say that, had I still been sitting in my office, I would be rejoicing at this statutory instrument as it scraps the necessity, once and for all, to fill in such declaration forms.” “Extending the scheme would cost us £1.4 billion a year and for what benefit? None, really. We can quite rightly remove the scheme altogether.”

Felicity Buchan, MP for Kensington, said that her constituency is ‘a major international hub of shopping and tourism’. “My concern is that these shoppers, who are a very distinct group of people, are highly mobile. The risk is that if we are no longer competitive, and we are the only European country not offering tax-free shopping, they will simply go to Paris or Milan.” She asked the minister to continue to review the effect of this measure and for a full impact assessment that not only includes the top line, “but looks at all the effects on the economy - the loss of VAT, the potential loss of business rates, and the potential effect if retail or manufacturing jobs go.”

Douglas Ross, leader of the Scottish Conservative Party, voted with the SNP, the only Conservative to do so. He said he has more Scotch whisky distilleries and visitor centres than any other constituency in Scotland. The boss of Johnstons woollen mill (also in his constituency) had told him that VAT-free shopping is responsible for over 50% of the company’s revenue in its London and Edinburgh stores. “It believes that at least two thirds of that will be lost, which would make those stores no longer viable. He went on to say that, overall, VAT-free shopping accounts for over a third of its retail as well as being critical to the customers that it sells to at a wholesale level.”

Ross concluded: “[F]or me this is not a party issue; it is a local issue and I am a local representative. For the jobs at risk as a result of this SI, I shall vote to annul it because that is the right thing to do to represent my constituents and stand up for their concerns and those of employers in my area. If the vote is not successful, I hope the Government will at least look again at the impact of the decision.”

SNP speakers

SNP speakers all backed the party’s stance and argued for retention of VAT RES.

Lisa Cameron, the chair of the all-party group for textiles and fashion, focused her remarks on the impact of this decision on that sector. “In 2019, £92 million in VAT-free fashion purchases were made in Edinburgh and a further £23 million in VAT-free fashion purchases were made in Glasgow and surrounding areas. Each of these purchases supports our high streets, businesses and jobs—high streets that need every purchase to survive at this time, businesses that are at the heart of local communities and jobs that help to provide for families and loved ones.”

Neale Hanvey, who has constituents working at Edinburgh Airport, said it was “hard to express the alarm, dismay, disbelief and anger when it emerged during the pandemic and just before the Brexit chaos that the UK Government planned to entirely remove VAT exemption on all airside sales, save for alcohol and tobacco. In tandem with that, the decision to abolish VAT RES for high-street sales was another significant blow.”

Patricia Gibson said the decision to scrap tax-free shopping for overseas visitors to the UK was “wrongheaded. It will cause significant damage, is completely unnecessary and should be reversed.” “As the covid pandemic leaves our airports beleaguered, tax-free sales for overseas visitors gives them millions of pounds every year in revenue, allowing re-investment in their businesses, which supports the wider economy.”

Richard Thomson said tax-free shopping was hugely important as a driver for tourism. “The Office for Budget Responsibility estimates that of the 1.2 million visitors who benefited from tax-free shopping in 2019, approximately 20,000 to 30,000 fewer will visit Great Britain every year because of this change in policy, and it is an absolute given that those who do will spend less. All told, the outcome of these changes puts at risk an estimated 40,000 jobs and over £1 billion-worth of investment.”

David Linden said that, for many travellers, VAT-free shopping is part of the travel and airport experience. “It is vital that the UK Government are doing all they can to support the sectors most affected by the covid-19 pandemic… Ending VAT-free shopping adds further concern for many people, such as my constituent Sharon, who are working at airports and already facing an uncertain future ahead.”

Labour and Lib Dem speakers

Labour abstained on the motion. Shadow Financial Secretary James Murray – the only Labour speaker in the debate -  criticised the Government for leaving it until the last minute to make decisions about post-Brexit arrangements. “The Government have had more than four years since the referendum to get this right, yet they announced their decision to end VAT-free retail both at airports and within Great Britain for all international travellers less than four months before it took effect, in the middle of a pandemic and with no plans to mitigate the economic damage.”

Murray said that, given the wide-ranging impact on jobs, “it is shocking that the Government did not fully consider the jobs impact of the change before taking their decision. If they were serious about protecting jobs, they would have looked closely at the wider impact of those changes across all sectors affected and throughout every part of our country, yet there is no evidence that they did so, and many of the assumptions in the calculations that they did carry out have been questioned by people respected in the industry.” He asked the Minister to commit the Treasury to reviewing the impact of the changes to VAT-free shopping on jobs across different sectors and across different parts of the country, and to report back to Parliament ahead of the March Budget.

Christine Jardine (Lib Dem) asked the Government to “think again, revisit this decision and re-examine the detrimental impact that it could have on our economy. Tourism and the individuals it brings here are a major contributor to the economy of the UK and each of its constituent parts, collectively and individually.” The impact will be felt initially by tourism, retail and airports, she said, but experts have warned that it will gradually spill out and affect other sectors, including hospitality. The Lib Dems backed the SNP’s motion to revoke.

Government response

The Exchequer Secretary to the Treasury, Kemi Badenoch, wound-up for the Government at the end of the debate. She said the new rules form “a carefully considered package of measures that was introduced following a wide-ranging consultation. The changes take into consideration the Government’s aim of minimising disruption at the border, along with World Trade Organisation commitments that require the Government to align the treatment of passengers travelling to and from the EU and non-EU countries.”

“In simple terms, the maintenance of the VAT RES and tax-free airside sales after the end of the transition period was never an option for the Government,” Badenoch explained to the Commons. “In reality, the choice we faced was between extending the schemes to all EU travellers or removing them both completely, because the World Trade Organisation rules specify that goods bound for different destinations must be treated the same. However, because EU visitors have never benefited from the VAT RES and still spend in UK shops without it, to extend it now would present a large dead-weight loss, and in effect the Government would be subsidising the shopping of EU visitors.” She said VAT RES disproportionately benefited London and the south-east of England, with around 90% of sales made in London and Bicester Village in Oxfordshire.

Badenoch added that the introduction of duty-free and the extension of personal allowances are estimated to cost the Exchequer £890 million over five years: “That money needs to be found from somewhere.” She said HMRC research “shows that in 2019, fewer than one in 10 non-EU visitors to the UK used the VAT RES. That is 1.2 million out of 60 million visitors. However, the claims in the Centre for Economics and Business Research report, where [the] figure of 138,000 jobs comes from, are based on the implausible assumption that the end of the scheme will cut non-EU visitor numbers by 4.96 million. That is simply not credible; it is four times as many people as currently use the scheme.”

Gavin Newlands wound-up the debate for the SNP, saying that the Minister’s response ‘does not really cut it’. “Some of the other contributions were incredibly whimsical in nature, talking about booze cruises, ferry discos and whatever. We are talking about people’s jobs. I am not talking about rich foreigners coming over here and getting money off. I am talking about the jobs that these schemes support, right here in our constituencies in the UK.”

This was followed by a vote not to revoke the regulations and to reaffirm the Government’s decision to scrap VAT RES.

The full 3 February 2021 debate can be read here.

By George Crozier