London business leaders have renewed their pleas to the Government to axe the so called “tourist tax” ahead of a feared “summer of discontent” caused by higher taxes and lower numbers of US shoppers.
With the peak summer tourist season officially set to begin with the Easter holidays London’s retail and hospitality sectors are increasingly concerned about a painful jobs shake out if ministers continue to refuse to allow foreign visitors to reclaim the 20% VAT on their purchases.
Employers are already grappling with the impact of increased National Insurance rates and lower thresholds that can add as much as £900 to the annual cost of hiring a member of staff.
The new rates only came into effect at the start of the new tax year on 6 April but already businesses are warning that will be forced to lay off staff over the coming months to offset the higher costs.
Now a new threat is looming. Travel bosses say there are increasing indications that the high spending Americans that London relies on to keep its shops, restaurants, hotels and cabs full over the summer months are booking fewer trips to London.
There is some anecdotal evidence that Americans fear a less friendly welcome in Europe this year because of the blizzard of tariffs and the outspoken criticism that the Trump administration has directed to its “allies” across the Atlantic.
There have been multiple reports, for example, of embarrassed Americans wearing Canadian Maple Leaf pin-badges while on holiday to disguise their national identity.
With the pound now up to around $1.32 against the dollar in the aftermath of the Trump inspired economic and financial chaos of last week London is no longer the “steal” that it was a few years ago after Liz Truss’s mini-budget debacle brought sterling to its knees and dropped it almost to parity against the greenback.
It is early days in the season yet but the dashboard is already flashing amber, if not full red just yet.
At a tourism conference in central London last month the Government’s tourism agency VisitBritain said forward flight bookings from the US through to August were 7% behind 2024. Bookings from other countries were also down, those from the UAE by 10% for example, but it is the lack of Americans that will really hurt. The VisitBritain presentation flagged the issue as “a concern” if the trend continues.
Latest passenger figures from Heathrow for March told a similar story with North American traffic down more than 7% and other travel industry sources confirmed numbers are soft this year.
Retailers and hotel bosses fears that even if the vital lifeblood of us tourism does pick up they will favour Continental destinations over London because of the 20% price differential on shopping. They argue that only a restitution of tax free shopping after four years without it will reverse the trend.
Former Fortnum & Mason boss Ewan Venters, now a director of British fashion label Paul Smith and a member of the Soft Power Council, said then Chancellor Rishi Sunak had axed the 20% VAT refund perk in January 2021 on the day Brexit came into force because of the political “optics” of otherwise legally having to extend tax free shopping to millions of EU visitors.
But, he added, “roll on a few years to an environment where businesses are continuing to struggle because of tax increases and rising costs there has probably never been a better moment to bring it back.
“We are now in a world where the advantages that Continental Europe has to attract visitors to do their shopping are greater than ever. It is not just a debate about shops, it’s about the people who fill our hotels, our restaurants, who use our taxis.
“And it is not just about foreign shoppers. if you live in Edinburgh you can go to Paris for a similar price as visiting London - but you also get tax free shopping on top, as well as all the same cultural attractions you can get in London.
“I fear we are on the cusp of a major summer of discontent with hospitality and retail companies having to make 15 to 20% redundancies. At Paul Smith the National Insurance changes will cost £1.5 million and will hurt our ability to make profits. You have to shift a lot of shirts to compensate for £1.5 million.”
He added that on a recent visit to Italy “Florence was awash with Americans, every voice was from the USA - but you don’t hear that in London.”
Another prominent London retail chief, Brian Duffy, CEO of Watches of Switzerland, said that since Brexit his London stores have seen “next to no US business and very little tourist business” because of the huge price differential between the UK and Continental Europe.
He said that even if the Government was not willing to conduct a total U-turn on tax free shopping it should consider a compromise whereby VAT can be reclaimed on purchases above a certain value threshold, say £500 or £1000.
That would have the benefit of attracting back those high spending shoppers from America, the Middle East and Asia currently giving central London the swerve without giving up all the VAT revenue from European visitors on smaller budgets. “I can’t seen how that wouldn’t be a win-win,” he said.
Hotelier Sir Rocco Forte, chairman of Rocco Forte Hotels, whose portfolio includes Brown’s in London, said: “According to the latest figures, UK tourist attractions are lagging well behind pre-Covid visitor numbers. They suggest around one in 11 tourists is staying away.
“Spending by tourists has also declined significantly. The self-defeating removal of tax-free shopping for tourists by the last government is one of the main factors behind this.
“In my hotel group, we see tourists spending less time in the UK and more in the EU, where they can still shop tax free. It’s not just retailers that are affected but the whole tourist economy, whether that’s hotels, restaurants, theatres, tourist attractions or taxis.”
Anda Rowland, director of the King’s tailors Anderson & Sheppard in Savile Row, said the current situation “couldn’t be more unhelpful, no-one is really taking it seriously.”
She said the loss of business had huge knock on impacts for suppliers from across the UK as well as on young British skilled workers looking to make careers in fields such as tailoring. She said: “It’s not just about Bond Street, we buy 90% of our cloths from UK mills and the shoemakers are in Northampton. We need to change the narrative, it’s all about skills, it’s about being able to carry on those skills and protect those skills.”
Dee Corsi, chief executive at business group New West End Company: “The ongoing uncertainty posed by Trump’s tariffs will no doubt have an impact on international visitation and spend, especially for price sensitive visitors from the US.
“The absence of tax-free shopping last year cost the West End £640 million in unrealised sales, with many international shoppers choosing to spend elsewhere in Europe, where they can take advantage of the policy.”
But despite he pleas, so far the Government has shown no willingness to change its stance on VAT free shopping. A Treasury spokesperson said: “The Government has no plans to introduce a new tax-free shopping scheme in Britain.
“According to the Office for Budget Responsibility, the withdrawal of the VAT Retail Export Scheme will save the Exchequer around £540million per year by 2025-26. A new Visitor Economy Advisory Council will develop a National Visitor Economy Strategy this autumn to support tourism growth across all regions. “
