New analysis shows that 162,000 tourists from outside the European Union sought refunds on VAT — a sales tax — exclusively in Britain in 2019. One fifth of those tourists are now claiming rebates in other parts of the EU, where the tax break still applies.

The UK ended the tax incentive in 2021 and has resisted strong lobbying from retailers and other companies linked to the tourism sector.

The 34,000 tourists who have shifted their tax-free shopping from Britain have also ramped up their spending from an average of €2,900 ($3,622) per person in 2019 to €3,800 in 2023, according to Global Blue, a Switzerland-based tax rebate provider that tracks passport numbers. 

France and Italy are benefiting the most, attracting more than two-thirds of these travelers, with Spain’s retail sector also getting a boost.

“The continued absence of a tax-free scheme is certainly impacting international sales at Selfridges,” said Andrew Keith, chief executive officer of the chain of upmarket UK department stores.

Political row

Britain’s refusal to bring back the tax break after leaving the EU is more damaging than the recent cost-of-living crisis, according to the New West End Company, a lobby group representing London’s tourist hot-spot.

However, the UK government believes its policy has bolstered the public purse and not deterred tourists. It commissioned an independent review by the Office for Budget Responsibility, a government spending watchdog, in 2020 and again this year. The OBR estimated a £462 million ($579 million) benefit to the public finances last financial year from closing the loophole, even when accounting for the effect on tourism and displaced spending — rising to over half a billion pounds in the current fiscal year.

Tourism to Britain appears to be strong. Hotel occupancy in London overtook pre-pandemic levels in December according to data from consultancy firm RSM UK, while 18.5 million passengers passed through Heathrow in the first quarter of this year — an all-time high. The city’s famous Oxford Street is mounting a comeback.

With a national election due later this year, some luxury retailers have given up on any prospect of a change of tack.

“Is the Prime Minister going to stand up and say ‘I called all of this wrong’?” said Michael Ward, Managing Director of Harrods, speaking at the World Retail Congress in Paris last month. “I doubt it very much.”

The opposition Labour party is expected to return to power and Ward said the tax rebate is “not on their agenda at all.”

Other retailers are still arguing the case.

“If we want British brands to be able to invest in jobs, shops and people we need to entice foreign shoppers to spend money in the UK,” said Thierry Andretta, Chief Executive Officer of Mulberry Group. “That requires offering them the same tax-free policy they enjoy in the rest of the world.”

The British handbag maker, which has struggled in the last few years, blamed a 4% decline in UK sales in the final 13 weeks of 2023 compared with the previous year on a lack of VAT-free shopping.

“There is this lost opportunity,” said Paul Barnes, Chief Executive Officer of the Association of International Retail. “Visitor numbers are actually as strong as they are in the rest of Europe now, but they’re not spending — that’s the difference.”

Global Blue’s data excludes Chinese shoppers as their numbers were still less than half pre-Covid levels. Most of the tourists in the data were from a group of Middle Eastern countries (33%) and the US (19%).