End of tax-free shopping perk hits UK's luxury destination status

By

Sandra Halliday

Published
Sep 28, 2021

There were plenty of warnings and they appear to be coming true. When the UK government ended the tax-free shopping perk for tourists, it was feared that international tourists would be more likely to shun Britain. And a new survey said they’re doing just that.

Aside from the lack of tourists that’s due to the pandemic, a new study from ESW (formerly eShopWorld) shows 46% of luxury shoppers say they’ll make fewer visits to the UK and spend less money with UK brands as a consequence of the removal of tax-free shopping.

And ahead of the start of China’s National Day Golden Week next week, the impact is even more marked. As many as 59% of Chinese respondents say that following the removal they’ll make fewer visits to Britain and 64% will spend less on British brands once travel restrictions are lifted.

The start of 2021 saw the rules changing around tax-free shopping. Put simply, global shoppers could no longer carry their luxury purchases home with them and reclaim their VAT at the airport. They could still get a VAT refund if they opted to have their purchases shipped home separately, however.

Retailers said the new rules would be unpopular with shoppers, were confusing, had been brought in after minimal consultation and would cost jobs. But the impact of the rule change was muted by the lockdown in place when they began and by generally low levels of international tourism since then.

However, ESW’s survey of almost 15,000 consumers across 14 countries suggests that as tourism picks up again, the UK could lose out. As well as the 46% who are less likely to visit Britain to shop in its luxury stores, a further 43% say the move removes a competitive advantage for the country’s luxury sector and that 46% also say they’ll prioritise travel to other shopping destinations that offer tax-free shopping when making travel plans.

The news about Chinese shopping tourists’ intentions is particularly worrying given the Bain & Company prediction that a massive 48% of global luxury spending will come from China by 2025.  

That said, the UK may not lose as much proportionally as it would if the same rule change had happened a decade earlier. That’s because Chinese consumers in general are now more likely to shop for luxury at home. The pandemic accelerated digital development in their domestic market and many brands have prioritised China for physical store openings. As many as 70% of those Chinese luxury shoppers buy within China itself.

While a sizeable 44% of respondents from all countries who’d previously travelled abroad to shop indicated that they’d resume taking international shopping holidays once fully vaccinated, 41% said they’d shop online as well as travel internationally to purchase. This perhaps suggests that the golden age of tax-free shopping may be hard to bring back for more cities than just those in the UK. A large minority — 25% of respondents who identified as ‘shopping tourists’ — have even indicated that they’d no longer take international shopping holidays. 

It means retailers in tourist destinations will need to work much harder in the future.

Martim Avillez Oliveira, Chief Commercial Officer, EMEA and APAC at ESW, said: “The events of the past 21 months have shown retail and luxury brands need to mitigate risks, diversify and balance their distribution to thrive. With international travel not expected to return to pre-pandemic levels before 2023 or 2024, brands need to find alternative routes to those highest value shoppers, who have a passion for British luxury and heritage brands and want to engage with and buy directly from brands.”