England’s luxury stores will have more than Christmas sales to worry about when they reopen next week. Many fear a planned tax change related to Brexit could hurt business even more than Covid-19 lockdowns.
Retailers are calling on U.K. Finance Minister Rishi Sunak to reverse a decision to abolish a perk for shoppers from China, the Middle East, the U.S. and other areas outside the European Union. The system lets them reclaim the 20% value-added tax on purchases in the U.K.
Sunak’s plan, which is expected to go into law as soon as Thursday and would take effect when the Brexit transition ends on Dec. 31, would make Britain an outlier in Europe, according to the Association of International Retail. Rather than boosting government coffers as intended, businesses say, the move will encourage tourists to shop in Paris or Milan rather than coming to London for Burberry coats or Mulberry handbags — a change that would put jobs at risk and also hurt hotels, restaurants, theaters and other tourist sites already suffering from the pandemic.
Ewan Venters, chief executive officer of the London luxury food emporium Fortnum & Mason, calls the plan “suicidal.”
“Just as retail needs everything in its armory to help its recovery, it would appear this policy is completely out of sync with that,” he said in an interview with Bloomberg Television.
Britain’s government is searching for ways to bolster finances as the pandemic pushes the economy into its worst crisis since World War II. It has defended ending the VAT refunds by saying they would be too costly to maintain post-Brexit. Under World Trade Organization rules, Britain can’t tax visitors from inside and outside the EU differently, according to the Treasury. So it either would have to extend the treatment to EU residents or abolish it.
Currently non-EU travelers can claim back the VAT on goods bought in Britain and taken out of the country within three months, minus administrative costs. The savings can be significant: For a 10,000-pound ($13,000) watch, it amounts to 2,000 pounds. Exceptions include goods purchased and used while in the U.K., such as perfume. There are also no refunds for items such as unmounted gemstones.
Shoppers from overseas may spend a lot, but they are still price-conscious, said Albert Read, managing director of Conde NastBritain, which publishes glossy magazines like Vanity Fair and Vogue that feature luxury brands. He cited the influx of retail touristsafter the U.K.’s vote to leave the EU in 2016 led the pound to depreciate against other currencies. A weaker pound could continue to attract tourists, though some retail analysts question whether that will be sufficient compensation.
“The very clear message from our advertisers is that the impact of this decision will be in some ways more severe than Covid in its long-term consequences,” Read said. It will affect “anyone who receives marketing spend from these fashion businesses.”
The wider economic impact of the new policy could mean the loss of as much as 680 million pounds in tax revenue and 41,000 jobs, according to a study by the Centre for Economics and Business Research.
According to the Treasury, the VAT relief cost British taxpayers 500 million pounds in 2019, and 92% of visitors to the U.K. don’t even use the system, a spokesman said by email. What’s more, shoppers can still reclaim the tax if their purchases are shipped to their home address.
Retailers say that brings little solace. For one thing, the cost of shipping, including any import taxes payable in the tourist’s home country, can often exceed the VAT. Then there’s the loss of instant gratification.
“There’s something about buying a luxury product and keeping it with you,” Julie Brown, chief financial and operating officer of trench coat maker Burberry Group Plc, said earlier this month on a call with reporters. “People feel it’s a lot safer that way.”
Tourists at Bicester Village, an outlet mall near Oxford, rarely use the so-called shop-and-ship option, according to James Lambert, deputy chairman of Value Retail Plc, which owns the mall.
The Treasury’s plan “won’t stop people coming to London to see Big Ben, but they will probably buy their Chanel handbag in Paris now,” Lambert said.