VAT numbers

In 2020 Rishi Sunak, as chancellor of the exchequer, announced that the UK would not re-introduce the VAT refund scheme which ended in 2021 after the UK left the EU. This resulted in the UK fashion, retail and luxury sectors beginning a significant lobbying campaign for its return.

The impact of abolishing the VAT free retail scheme has been significant for the UK retail and luxury sectors. Market leaders say that the ‘tourist tax’ has resulted in an estimated two million, largely affluent tourists, choosing instead to head to other European cities such as Paris and Milan rather than London. This is to benefit from cheaper shopping experiences as the removal of VAT free shopping adds an additional 20% to a price tag for foreign tourists who are unable to reclaim the VAT on purchases they make in the UK.

The impact on the high street and luxury retail sector in the UK is significant. A recent study by the Centre for Economic and Business Research revealed that the `tourist tax' is costing the UK £10.7bn in lost GDP. Spending for non-EU visitors in Britain has also decreased by 17% from 2021 to 2022 and this declining trend continued into 2023.

The loss of these high spend tourists is impacting the travel retail sector significantly with many travel retailers changing their range planning and category mix or even intentionally reducing their own costs to draw in additional tourists. London Heathrow's World Duty Free store announced that it will sell its luxury cosmetics and perfumes at a reduced `airport price', lower than the high street price to ensure that visitors return. Luxury brands such as Burberry have blamed the lack of VAT free shopping in the UK as the reason for a slow post-Covid recovery in the travel retail sector.

Pragma analysis has shown that there has been a reduction in space allocation and revenue from the luxury retail sector in UK airports. UK airports such as Heathrow and Gatwick are now focusing and prioritising space towards more premium and gifting categories as well as selling products exclusive to the airport to try and increase spend from lower value passengers.

Heathrow, in collaboration with World Duty Free, launched an exclusive and limited release of Fable Piper Chapter Seven single malt whisky. The limited run of 575 bottles included a takeover showcase and artwork exhibition to draw passengers in with digital activation to promote it on social media. Passengers who purchase the bottle also receive a limited-edition print of the illustration from the exhibition which promotes an exclusive shopping experience without the large price tag.

Heathrow also opened a JD Sports as part of its T2 airside provision to provide additional choice to the premium and high street passengers that travel through the airport. The 340 sqm store is one of the largest shoe stores within UK airports and includes a wide range of athleisure and footwear, appealing to Gen Zs and Millennials.

While the loss of VAT free shopping is negatively impacting luxury sales within UK airports, the re-introduction of Duty Free shopping to European passengers has provided increased revenue for smaller UK airports. Manchester Airport doubled extended the size of Terminal 2 and included a 1,980 sqm walkthrough Duty Free Store and London City Airport expanded it’s Duty Free store from 290 sqm to 420 sqm to accommodate the increased demand for Duty Free.

Although the removal of VAT free shopping has impacted the luxury sales market within travel retail, there are a variety of ways in which airports can minimise the impact on revenue.

Katie Hastings