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UK Plans Tax- and Duty-Free Changes in January

Tax-free shopping in the U.K. is coming to an end on Dec. 31.

The British government is making changes to value-added taxes (VAT) and duty-free shopping that will take effect on Jan. 1. VATs are essentially broad-based consumption taxes assessed on goods and services bought and sold in European Union (EU) countries.

Currently, the VAT Retail Export Scheme allows shoppers to claim back 20 percent of the purchase price that was paid in VAT for goods bought in Britain, provided they are from a country that’s not part of the EU. Last month, U.K.’s Treasury department, under the leadership of chief financial minister Rishi Sunak, said that tax-free shopping would end in January. That would make the U.K. the only European country that doesn’t offer tax-free shopping.

As Chancellor of the Exchequer, Sunak has oversight of the Treasury, controls public spending, and can raise revenue through taxation. And that’s what has some retailers confused because they fear the retail sector will lose revenue as shoppers head to other European countries to do their shopping just as the country will be dealing with the impact of its EU exit. The Treasury has countered that argument by noting that overseas visitors can still get some tax-free advantage when they buy goods in stores and ship them home.

That’s not good enough for many in the retail sector. Critics say implementation of the planned VAT changes could result in the loss of 70,000 jobs, and pry 5.6 billion pounds ($7.25 billion) from the U.K. economy. In a signed letter, some retailers petitioned the Chancellor to reconsider the planned policy change.

“The damage will be significantly wider than the Treasury envisages, our luxury goods manufacturing based will be badly wounded and all global brands will half any investment in the UK due to dramatic drop in demand,” Neil Clifford, Kurt Geiger’s CEO, said in his letter, according to Drapers. He also noted that the impact isn’t just in retail stores, but also would affect U.K. hotels, restaurants and theaters if they were to go elsewhere. Clifford said his company was planning about 500 job cuts early next year, or 25 percent of its workforce.

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And Selfridges’ managing director Anne Pitcher told the Daily Mail that the end to tax-free shopping was “another nail in the coffin” for city center retailers still reeling from the coronavirus lockdown as they try to lure back shoppers. “This should have been a golden opportunity to make Britain one of the most desirable countries to visit. Instead, with a single swipe, the government has taken more than 20 billion pounds ($25.88 billion) of opportunity from the economy,” she told the publication.

While Covid-19 has certainly impacted the U.K. economy, Brexit ignited much of the current uncertainty. Fiscal stimulus has helped to keep momentum going following the initial Covid-19 outbreak, and a slight rebound in retail sales was just starting to take hold. August retail sales volumes rose for the fourth consecutive month in August, although apparel stores were still 15.9 percent below February’s pre-pandemic levels. However, that recent rebound is now threatened by a second wave of Covid-19 cases, according to Nick Bennenbroek, international economist at Wells Fargo Securities.

“More fiscal stimulus would help keep economic momentum going. Although, there are signs that the U.K. government is softening its position on winding down much of the economic support enacted in the spring. In our view, fiscal polity is, at best, likely to exert a neutral impulse to economic growth going forward,” Bennenbroek said.

As for duty-free changes, British passengers traveling to EU countries can still buy duty-free goods in British ports, airports and international train stations, as well as aboard ships, trains and planes. And the allowance for duty-free alcohol, tobacco and other goods brought in by passengers from non-EU countries will be increased and extended to EU countries, according to the Baker & McKenzie law firm.