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How Brexit-Linked VAT Rules Could Make British Brands the ‘Biggest Losers’

It isn’t often that a government implements a policy that seems almost designed to shoot its own capital city in the foot. And yet that is what experts are saying the British Treasury’s new policy on VAT will do to London—taking it from its current position as one of the world’s undisputed luxury capitals to a city no longer able to compete with Paris.

Unsurprisingly, this new policy to remove the VAT, or value-added tax, rebate is a direct consequence of Brexit. Previously, tourists could claim back 20 percent of the purchase price of all goods over 135 pounds ($185) at the airport. But worried that EU visitors, who are now third-party nationals, would also claim back their VAT on items bought in the UK, the British government has instead decided to scrap the entire policy—for all tourists, no matter how much they spend.

In 2019, foreign visitors (excluding those from the EU) purchased 3 billion pounds ($4.1 billion) worth of luxury and fashion goods in the UK—and spent the same sum while staying in hotels and eating in restaurants. Of that, 75 percent was in London, and these visitors helped sustain a thriving luxury market that spans Mayfair, Knightsbridge and the West End, and goes all the way out to Bicester Village in Oxfordshire.

“There is a high concentration of money spent that comes from a relatively small amount of people who spend over a certain threshold,” says Paul Barnes, CEO of Association of International Retail. “These people—who mostly come from China and the Middle East—have contributed a huge amount to the British economy but will simply make the choice not to shop in London because it is less advantageous to them. The UK is now the only country in Europe not offering a VAT rebate, so why would they not go to Paris instead, if they can save thousands of euros on luxury goods there?”

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‘Uncompetitive with Europe’

French officials are already rubbing their hands at the prospect of tempting these customers across the Channel. France has dropped its minimum spend required to recoup VAT from 175 euros ($212) to 110 euros ($133) and is investing in new luxury malls in central Paris and in Charles de Gaulle airport.

“Essentially what we are doing is disincentivising customers from shopping in the UK and making us uncompetitive with Europe,” says Helen Brocklebank, the CEO of Walpole, the official home of British luxury. “When people come here from China, for example, they tend to visit a couple of cities on their trip—but if London offers no VAT rebate and Paris and Milan do, then customers will spend less time here and wait to shop in mainland Europe instead.”

The Treasury has implemented this policy because it believes it will recoup 500 million pounds ($686 million) annually from it, but many in the fashion industry and beyond believe that number is flawed. The Office for Budget Responsibility—an independent commission set up by former Chancellor George Osborne—has assessed this new plan and said that the government has got its sums all wrong, as it has failed to take into account price elasticity.

According to their workings, recouping the 20 percent on VAT means the UK will lose 40 percent of luxury sales from foreign nationals—a loss of 1.2 billion pounds ($1.66 billion) to the country. That also takes their 500 million pounds ($686 million) in savings down to 300 million pounds ($411 million), and if visitors spend even 10 percent less on hotels and restaurants than they did before then the Treasury will be facing a serious deficit. The OBR also estimates 40,000 jobs will be lost as a result of this policy.

The biggest losers

British brands are set to be some of the biggest losers from this row. While global companies such as LVMH will simply put less money into their British flagships and more into Paris and Milan, smaller domestic brands like Mulberry use London as their storefront, and if foreign visitors are no longer shopping here, they will lose a hefty percentage of sales. Statistics show visitors are always more drawn to heritage brands in the country they are in: if they are shopping in Milan rather than London, they are likely to choose Gucci over Burberry.

“The fashion sector was growing by 10 percent a year and was worth 48 billion pounds ($66 billion) before the pandemic,” says Brocklebank. “It is an extraordinary credit to the country and an incredible national asset—let’s really value it as it will keep making money for us. British luxury brands are the jewel in the crown of the country—they are the calling card for Britain but if we continue down this path we will damage them.”

Add to that is the loss of domestic spend. London attracts visitors from all over the UK, but why travel from Edinburgh to the capital when Milan isn’t much further on a plane and where goods will be 20 percent cheaper? And even Londoners who have decided to purchase an expensive handbag will likely opt to hop on the Eurostar and buy it in France instead. The savings alone will be enough to finance a lavish weekend in Paris.

“It will be damaging in so many ways. Right now, London is the luxury capital of the world,” says Brocklebank. “There is an incredible ecosystem of art and culture and theatre and restaurants—and fashion is a very important part of it that ties it all together. We need to protect London as it’s an enormous national asset. It not only generates a huge amount of wealth, it is also a showcase for the country and if we let it lose its lustre it will be very damaging for all of us.”