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Top Luxury Group Urges Reversal to UK’s ‘Disastrous’ VAT Decision

The Covid-19 pandemic hampered retail worldwide, but its impact on the U.K.’s fashion businesses—particularly in luxury—was pronounced throughout 2020 and 2021. One industry group dedicated to promoting and developing luxury in the U.K. is calling to reinstate value added tax (VAT) benefits for foreign visitors as part of a push to bolster the nation’s retail sales by 1.2 billion pounds ($1.5 billion).

The effects are still being felt, most recently with luxury fashion label Amanda Wakeley plunging into liquidation a year after falling into bankruptcy. Luxury names such as Brooks Brothers UK and Ralph & Russo also collapsed into administration last year, in the wake of other high-profile British fashion bankruptcies including Debenhams, Topshop and others.

Walpole, a luxury trade association that represents more than 250 luxury brands across the pond, including Alexander McQueen, Burberry, Farfetch, Harrods and Purdey, outlined in a recent report the success of the U.K.’s VAT Retail Export Scheme (VAT RES), which directly attracting over 600,000 non-E.U. visitors a year and encouraging millions of others to shop across Britain during their visit.

Yet the government abolished the initiative at the end of 2020 due to the costs related to keep it going throughout Brexit, making the U.K. the only country in Europe that doesn’t offer foreign visitors a tax refund after shopping.

“Luxury tourists who would previously come to London to buy clothes, jewelry and handbags are now increasingly choosing Paris, Milan and Madrid instead,” the report said.

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The report cited a 2019 tax-free shopping business Global Blue study, in which 93 percent of international travelers said they would be less likely to shop in the U.K. if they couldn’t reclaim the VAT, instead opting to travel to a country like France, Italy or Spain.

Without the VAT refunds that are still active elsewhere in these E.U., these neighboring countries now have a 20 percent price advantage over the U.K. according to Paul Barnes, chief executive of the Association of International Retail (AIR). Barnes said in the report that cutting the VAT RES program is “pushing those that traditionally contribute around 28.4 billion pounds ($35.7 billion) a year to our economy towards continental Europe.”

Walpole argues that scrapping VAT RES was “disastrous” for tourism, hospitality and retail, pointing to estimates from the Office for Budget Responsibility (OBR) that the decision to abandon the scheme will lead to a drop of 38 percent in retail sales to non-E.U. visitors in 2022 compared with 2019.

The report recommends that the U.K. government work with businesses to design a new form of tax-free incentive to replace the old scheme and “make Britain the best place in the world to visit to shop.”

The association pointed to other markets where shopping has since recovered—spending by visitors from countries comprising the Gulf Cooperation Council (GCC) skyrocketed 53 percent in the E.U. in the 2021 fourth quarter over 2019. In the same period, GCC shopper spending in the U.K. was only at 60 percent of levels three years ago. For U.S. visitors, in the same period, retail spend in the E.U. had returned to 91 percent of pre-Covid levels, while in the U.K. it was only at 49 percent.

Tourism is always a massive money mover, but a post-pandemic comeback could only help matters for the U.K., Walpole said. In 2019 alone, high-end tourism in the U.K. was worth 30 billion pounds ($37.7 billion), according to research Bain & Co. collected for the report. These luxury visitors spend approximately 14 times more daily than mass tourists.

A recent report from U.K.-based retail footfall analyst Springboard indicated that store traffic as of the first week of May was still down 8.3 percent from 2019, showing that there is still room to run for spending to occur in the store—particularly from visiting tourists.

“It doesn’t take an economist to realize the benefit these high-spending visitors bring to the wider tourism ecosystem—job creation, positive cultural and social spillovers throughout the country; just better economic sense overall,” Walpole CEO Helen Brocklebank said in the report. “If the U.K. is to be restored as the world’s number one luxury destination, then it’s patently clear we need a coherent strategy and policy changes to get us there.”

Alongside the tax-free shopping replacement, Walpole also recommended reforming the U.K.’s visiting visa system and changing the working visa system so that the country can better fill job vacancies in both retail and hospitality. It also called for policymakers to extend Sunday business hours in two major shopping centers in London—Knightsbridge and the West End. Meanwhile, developing a series of promotional, multi-brand tours, it added, could better market Britain’s high-end retail attractions to a wider global audience.

Walpole pointed to the Schengen system used throughout the E.U. as a model for lowering the country’s barriers to entry. While visitors can apply for the Schengen electronic visa waiver at any time for multiple entry over a six-month period, the U.K.’s version has to be applied for at least 48 hours in advance of travel and allows just a single entry in six months.

And in the case of the working visa, the combination of Brexit and the pandemic’s spread made the Skilled Worker visa application process more difficult for those who wanted to work in the U.K.

The association has a stake in current affairs throughout the U.K., estimating that its member businesses are collectively worth roughly 48 billion pounds ($60.3 billion) to the country’s economy, contributing 2.4 percent of its GDP. The organization of brands across retail, hospitality, interior design, beauty and automotive employs more than 160,000 people in the U.K.