VAT reform is the missing piece of the Chancellor’s growth strategy

The upcoming Spring Statement represents a huge opportunity for Chancellor Rachel Reeves to complete what has already been an impressive set of pro-growth measures for the UK tourism sector.

In January, the Chancellor backed a third runway at Heathrow Airport, a much-needed move to keep the country’s largest airport as the hub between the Western Hemisphere and Europe. Since then, the government has continued this momentum, with Transport Secretary Heidi Alexander recently indicating support for Gatwick's second runway plans and promising a swift decision on Luton Airport's expansion proposal after previous delays.

These infrastructure commitments send a powerful signal that this government understands the vital importance of tourism and travel to the UK economy. But there remains one hangover from the previous administration that continues to hamper our competitiveness: the tourist tax. 

A brief history of the tourist tax

When the UK was part of the EU, we implemented a VAT refund scheme as part of the wider bloc.

This allowed visitors to the EU to obtain refunds for high value items bought as they left. When the UK left the EU in 2020 it decided not to replicate it.

The EU has wisely kept the scheme in place, leaving UK retailers in a horrible situation. Almost all the goods they sell can be had for less money just across the channel in the EU. Even worse - since UK residents are now “tourists” when they visit the EU, they can obtain the same savings. This means retailers are not just losing touristic spend but domestic spend too.

The last Government briefly considered eliminating this distortion but eventually u-turned on the decision. 

A faster route to growth

The UK needs every advantage it can get, and fast. Growth has been essentially zero or negative in recent months, and any growth from the Heathrow decisions won’t be realised for years.

Meanwhile the tourist tax could be repealed at the stroke of a pen. And the immediate cost to the exchequer will soon be swallowed by the extra money these shopping tourists will bring in. 

Research commissioned by Prosegur ChangeGroup from Oxford Economics year found that the tourist tax is likely costing the UK economy a staggering £11.1 billion annually.

The irony is that this policy was one area where Brexit actually offered an opportunity. Outside the EU, the UK gained the freedom to offer VAT refunds not just to visitors from Asia, the Americas and the Middle East, but also to EU tourists. 

The Evidence is Clear

The impact has been predictable. While Spain, France and Italy have seen international tourist numbers exceed pre-pandemic levels, UK visitor figures still lag behind 2019. Luxury shopping – once a major draw for high-spending international visitors – has been particularly hard hit.

Many high-net-worth tourists now plan their European itineraries to include Paris or Milan specifically for major purchases, bypassing London entirely or limiting their spending here. Why would a tourist from the United States or China spend £10,000 on luxury goods in London when they could save hundreds or even thousands of pounds by making the same purchases in Paris?

Building on Pro-Growth Momentum

The current government has shown admirable commitment to removing barriers to growth. The airport expansion decisions demonstrate a willingness to make tough but necessary choices for long-term economic benefit. Reinstating VAT refunds would be entirely consistent with this approach.

Unlike airport expansions, which require massive capital investments and years of construction, VAT reform could be implemented quickly and would largely pay for itself through increased visitor numbers and spending. This isn't about giving handouts to luxury retailers or wealthy tourists – it's about creating a level playing field that allows the UK to compete effectively for international tourism spending.

With American tourists already benefiting from a strong dollar and Chinese visitors gradually returning to international travel, the timing couldn't be better. By reinstating VAT refunds now, the UK could see immediate benefits during the crucial summer tourism season.

The government has already shown it isn't afraid to make bold decisions when the economic case is compelling. 

In her January speech, the Chancellor spoke about making the UK "more open and more connected." There are few measures that would more clearly demonstrate this commitment than reversing an isolationist policy that has needlessly disadvantaged our tourism sector since Brexit.

Sacha Zackariya is the author of Leading Travel and Tourism Retail