Written evidence submitted by the Association of International Retail (AIR)

Submission to the Digital, Culture, Media and Sport Select Committee “Promoting Britain Abroad” Inquiry by the Association of International Retail (AIR)

Executive Summary and Recommendations

Section 1 - The importance of shopping to the UK’s international visitor economy

ES 1.              AIR represents businesses and organisations that wish to increase the level of spending by international visitors in UK high street shops and airports. Shopping is a major draw for international visitors to the UK.  Arguably, it is more of a draw for those visiting as international tourist who are making a choice between competing destination for their holidays and for whom the quality, quantity and value of shopping is a factor they take into account.

ES 2.              VisitBritain states that 23% of international holiday visitors were motivated by shopping, based on the ONS International Passenger Survey.

ES 3.              For high spending visitors shopping is even more important.  Visitors from the Gulf states spent £2.6 billion in the UK in 2019, spending on average 3.5 times more than the average international visitor.  The IPS showed that shopping was seen as motivational factor for 51% of visitors from Saudi Arabia and 41% of visitors from the UAE. In 2019 while GCC visitors were just 5% of all non-EU visitors, they accounted for 26% of the £3 billion tax free shopping spending.

ES 4.              Similarly, the Chinese are now the world’s highest spending travellers. VisitBritain states that “going shopping is the number one activity which most Chinese visits will feature.“ In 2019 Chinese tourists were only 5% of non-EU visitors to the UK but accounted for 32% of all tax-free shopping. 

ES 5.              In London’s West End, in 2019 international visitors were 25% of visitors but accounted for 50% of spending, totalling £5 billion.

Understanding the different groups of international shoppers

ES 6.              A successful, high productivity international visitor destination must attract a balance of visitors that includes these low volume but high spending visitors.

ES 7.              Non-EU visitors spend 2.6 times more than EU visitors.  Tourists and business visitors spend more than those visiting friends and relatives. The top 2% of tax-free shoppers in 2019 accounted for 22% of all spending (average annual spend of €55,000).  The top 15% accounted for 42% of all UK tax-free shopping in 2019.

Section 2 - What needs to be done to re-establish the UK as a holiday destination for international travellers? 

Policy Area One - Enhance the UK’s visitor visa product

ES 8.              The UK’s visitor visa product and application system is falling behind that of Schengen.  This makes the UK a less attractive destination, particularly for international tourists.

ES 9.              In the Gulf states, the Government should enhance the Electronic Visa Waiver Scheme to match that of Schengen

ES 10.              In China, the Government should build on its earlier successes by introducing new initiatives to make the UK visa more attractive, particularly by reducing the difficulty of applying for both a Schengen and UK visa to include the UK on a multi-country European tour.

Policy Area Two - Reconsider the Treasury’s decision to end high street and airside tax-free shopping, based on an analysis of the full impact on the UK economy and jobs.

ES 11.              Since the Government ended tax-free and airside tax-free shopping on December 31st 2020, Britain is now the only European country not to offer tax-free shopping to non-EU visitors, putting us at a competitive disadvantage with nearby countries, particularly France and Italy.

ES 12.              The Office for Budget Responsibility estimates a loss of £1.2 billion in sales as a direct result.  Neither HM Treasury nor OBR has estimated the additional indirect loss to hotels, restaurants, entertainment, culture or travel as high spending international visitors choose to visit the UK less often, spend less time here on their trips and spend less money while they are here. Early indicators show that spending by non-EU visitors is being diverted from the UK to other EU countries. Industry estimates a loss of around 20,000 jobs in retail, travel and manufacturing throughout the UK as a direct result of ending tax-free and air-side tax-free shopping.

ES 13.              AIR believes that the Government has underestimated the number of international visitors affected by the ending of tax-free and air-side tax-free shopping; misunderstood the impact on visitor behaviour; overestimated the cost of extending the scheme to EU visitors; and failed to take into account the indirect costs of ending the schemes. Given the uncertainty over HM Treasury’s estimates and the potentially negative impact of the withdrawal of tax-free and air-side tax-free shopping both on British businesses and HM Treasury‘s tax revenues, we believe that the government should introduce new tax-free shopping schemes and, at the very least, agree to the call from the Chairman of the Treasury Select Committee for an independent assessment of the full impact of ending the schemes.

Policy Area Three - Extend Sunday trading in the International Centres

ES 14.              Sunday trading restrictions in England and Wales make the UK less competitive than other international shopping destinations.  Extending Sunday trading hours in the UK’s two International Centres (the West End and Knightsbridge) would generate an estimated additional £250 million in sales annually.

Section 3 - Does the Tourism Recovery Plan go far enough to support the industry’s recovery from the Covid-19 pandemic?  

ES 15.              AIR believes that without appreciating the importance of shopping as both a motivator to choosing to visit the UK as a major generator of tourism spending and adopting policies that diminish the UK’s attractiveness as a shopping destination, the Government has made it difficult to meet the aims of its Tourism Recovery Plan.

Section 4 - What should the UK be doing to maintain its status as a ‘soft power superpower’ and further promote its culture and heritage on the global stage?

ES 16.              The UK can capitalise on its exit from the EU by restoring and extending tax-free and air-side tax-free shopping to EU visitors to increase Britain’s attractiveness to high spending visitors. Because British visitors to the EU can now-shop tax free in the EU, Britain has become less attractive even to UK shoppers.

ES 17.              Making Britain less attractive as a shopping destination may shift the allegiance of high spending visitors from the UK to nearby competitor countries. Diminishing visitor loyalty to the UK and deflecting it to France and Italy will weaken vital investment relationships and reduce Britain’s competitiveness when investment decisions are made.

ES 18.              British heritage brands, such as Burberry and Mulberry are major contributors to Britain’s soft power.  Ending tax-free and air-side tax-free shopping, and the resulting impact on sales is damaging to these important British fashion brands.

RECOMMENDATIONS

Recommendation One – The Government should recognise the importance of Britain’s retail, both as a motivator for international visitors to choose to visit the UK and as a major income generator, responsible for around 25% of all spending by international visitors.

Recommendation Two – The Government should appreciate the different types of international visitor and their importance to the UK economy and seek to create a more productive international visitor economy by continuing to attract low volume but high spending visitors as part of a balanced mix.

Recommendation Three – The Government should enhance its Electronic Visa Waiver Scheme for visitors from GCC states so that it at least matches, if not exceeds, the new Schengen product.

Recommendation Four - To build on the success of the earlier initiatives, the Government should consider further enhancements to the visitor visa regime to encourage more visits by high-spending Chinese people, such as:

• Introducing a standard 10-year visitor visa, as countries like the USA have done, for Chinese visitors, and as was proposed by David Cameron during President Xi’s visit in 2015.
• Expanding the joint Schengen/UK visa application process in China – currently a pilot with Belgium - to Schengen countries with larger numbers of visitors, such as France, Italy and Germany.
• Extending to China the Electronic Visa Waiver Scheme used in the Middle East. 
• Introducing a visa for the families of international students studying in universities throughout the UK that lasts as long as the student visa to encourage parents to visit their children multiple times during their studies.  Parents of international students are likely to be high net-worth and have an additional reason for multiple visits to the UK.

Recommendation Five – The Government should work with industry to introduce an enhanced, digital tax-free shopping scheme immediately and introduce a new airside tax-free concession for higher value items and, at the very least, commission an independent assessment of the full impact of ending tax free shopping and airside tax-free shopping

Recommendation Six – The Government should add the UK’s two International Centres to the list of exemptions to the 1994 Sunday Trading Act to allow Britain to compete better with other international retail districts.

1.              The Association of International Retail and the importance of shopping to the international visitor sector

International retail and the Association of International Retail

1.1              International retail is the sector of the retail industry that makes sales to visitors to the UK from abroad, both in high streets and in airports.  Many of those goods are subsequently exported when the visitors leave the UK.  At an estimated £7 billion of sales in 2019, the international retail sector is the UK’s 13th largest export sector.[1]

1.2              The Association of International Retail (AIR) works with businesses, travel and retail organisations and government to ensure that the policy and economic environments allow international retail to realise its full growth potential.  Our key supporters include Selfridges, Harrods, Harvey Nichols, Heathrow Airport, Manchester Airport, Bicester Village, New West End Company, Cadogan, Grosvenor, Shaftesbury, Marketing Manchester, Essential Edinburgh, Walpole, Global Blue, Planet and the Tourism Alliance.

1.3              Before responding to the specific questions asked by the Committee, it is important to establish the importance of shopping to international visitors and to understand the break-down and behaviour of different types of visitors

The importance of international visitors to the UK economy – pre-COVID-19

1.4              In 2019 the UK’s international visitor sector generated £28.4bn for the UK economy.[2]  In the ten years from 2009-2019 spending by international visitors grew by over 60% (from £17.8bn), outstripping the overall growth of the UK economy by three times.[3]  This high level of growth was driven by a number of factors, but a key element has been the expansion of the Chinese market who, in 2018, became the world’s highest spending visitors and for whom shopping is the number one attraction (see 1.10 and 1.19-1.21). 

1.5              Pre-COVID-19 VisitBritain was forecasting that spending by international visitors in the UK would grow to £57 bn by 2025, a rise of 97%.[4]  The Government is now planning for international visitor numbers and spending to return to 2019 levels by the end of 2023.[5]

1.6              Visit Britain splits the 40.9 million (2019) international visitors to the UK in two clear ways. First, the 24.8 million EU-visitors (61%) and the 16 million non-EU visitors (39%).[6]  Then into tourists (41%), business travellers (21%) and those visiting friends and relatives (VFR) (30%).[7] Understanding the different groups is important when examining international shopping and these are looked at in more detail in 1.14-1.22.

The importance of shopping to the UK’s international visitor economy

1.7              Shopping is a major draw for international visitors.  Arguably, it is more of a draw for those visiting as international tourist who are making a choice between competing destination for their holidays and for whom the quality, quantity and value of shopping is a factor they take into account.  Business travellers and those visiting friends and relatives have other, obvious reasons for visiting the UK rather than any other country.  VisitBritain states that VFR trips account for a lower share of inbound visitor spend (23%) than they do of visits (30%), while holiday and business spending (47% and 20% respectively) are in line with their respective share of visits (41% and 21%).[8]

1.8              Shopping is a major motivator for international visitors. VisitBritain estimates that while 57% of all international visits include shopping, that figure rises to 70% for international tourists.[9] The Tourism Recovery Plan mistakenly underrates the importance of shopping as a motivator to visit Britain.  The chart on page 12 lists 16 motivators, with cultural attractions being the top motivator.  Shopping does not appear on the list.  This is because the data is taken from a survey quoted in VisitBritain’s Foresight 150 study[10] where respondents were given a list of 30 attractions to choose from.  Shopping was not one of the options given and so, unsurprisingly, did not appear in the results.  But the same report, three pages later, cites the International Passenger Survey (IPS) which included a motivational question with no predetermined categories.  This showed that 23% of international holiday visitors said that they were motivated by shopping.[11]

1.9              Importantly the IPS showed that shopping was seen as a motivational factor for 51% of visitors from Saudi Arabia and 41% of visitors from the UAE, these being high-spending visitors. In 2019, GCC visitors spent £2.6 billion in the UK.[12]  The average GCC visitor spent £2664 per visit, compared with £696 for the average international visitor.[13] While GCC visitors were just 5% of all non-EU visitors, they accounted for 26% of the £3 billion tax free shopping spending.[14] 

1.10              Shopping is also particularly important for visitors from China, now the world’s highest spending international travellers.  In 2019 they spent $254.6 billion globally, up from just $43.7 billion in 2009.[15]  VisitBritain states that “going shopping is the number one activity which most Chinese visits will feature, followed by dining in restaurants, visiting parks or gardens, museums or galleries, and castles or historic houses”.[16] In 2019 Chinese tourists were only 5% of non-EU visitors to the UK but accounted for 32% of all tax-free shopping.  During his 2015 State Visit to the UK, President Xi was asked by David Cameron what Britain could do to attract more Chinese visitors. He replied, “build more Bicester Villages.”

1.11              It is important to highlight this error in the Government’s view of the importance of shopping as a motivator because the selective use of official data gives the false impression that shopping isn’t a major motivator for choosing to visit the UK and this can wrongly influence ministerial decision making.  There is, for example, no mention of retail in the Tourism Recovery Plan, even though it is responsible for a quarter of all international visitor spending. More worryingly, a Lords Treasury Minister used this selective and misleading reference from VisitBritain’s Foresight Report to state in Parliament that tax-free shopping was not a motivator in response to a question about the impact of the abolition of tax-free shopping, which is clearly not the case.[17] This is despite HM Treasury being aware of the HMRC consumer research on the impact of tax free shopping conducted only in May 2020 which concluded that “VAT RES does play a role in attracting overseas visitors to the UK, especially from China and India” and “VAT RES is a strong influence in the decision making process.”[18]

1.12              London in particular benefits from the importance of shopping to international visitors.  Arguably together, the two International Centres (The West End and Knightsbridge) produce the one of the best concentrations of shops (in terms of numbers, quality, size and mix), restaurants, hotels, entertainment and culture in Europe and the world, combined with the history, architecture and the atmosphere of outdoor shopping districts, set within established, attractive and historic residential areas.

1.13              This concentrated mix and scale of shopping, combined with such a wide range of complementary attractions, all within an open-air setting, is unmatched worldwide. And when international visitors are attracted to London to spend in its shops, they also spend on hotels, restaurants, travel, entertainment and culture. In London’s West End, for example, in 2019 international visitors accounted for 25% of all visits but were responsible for over 50% of sales, spending around £5 billion on goods and services.[19]

Understanding the different groups of international shoppers

1.14              As shown in 1.6 above, VisitBritain records EU visitors and non-EU visitors.  Non-EU visitors are the biggest spenders.  In 2019 non-EU visitors accounted for around 39% of the UK’s international visitors but were responsible for 63% of all international visitor spending in the UK.  In 2019 the 16 million non-EU visitors to the UK spent £17.8 billion while the 24.8 million EU visitors spent £10.6 billion, meaning that on average each non-EU visitor spent 2.6 times more than an EU visitor. 

1.15              While there is no official data, anecdotal evidence from individual stores in London’s International Centres suggest that spending by EU visitors on shopping is even lower compared with that of non-EU visitors.  Some stores report that EU visitors are responsible for only around 10 pence in every pound spent by all overseas visitors, despite outnumbering non-EU visitors by two to one. This is important when considering the cost of extending tax-free and air-side tax free shopping to EU visitors (covered in paras 2.27-2.28 below).

1.16              From a shopping viewpoint, the non-EU visitors contribute significantly more to the UK economy than those from the EU.  Based on the Government’s figures (that non-EU visitors spend 2.6 times more than EU visitors), non-EU visitors spend £5.1 billion on shopping compared to £1.9 billion by EU visitors.  Based on industry experience, non-EU visitors spend £6.3 billion compared to £700,000 by EU visitors (see paras 2.27-2.28). It is therefore important to understand in more detail the spending habits of the non-EU visitors.

1.17              Data on tax-free shopping is a good guide to the behaviour of non-EU shoppers. In its review of the VAT RES in 2013 HMRC said “Inbound tourism makes a vital contribution to the UK economy, earning £18 billion in foreign exchange for the UK each year. When they come here, most visitors love to shop. The VAT Retail Export Scheme – also known as Tax Free Shopping – plays a key part in the shopping experience for our visitors and positively influences their views on Britain as a value for money shopping destination.”[20]

1.18              Tax-free shopping agencies (before tax-free shopping was ended by the Government on December 31st 2020) split non-EU international tax-free shoppers into three categories –

• Infrequent: 85% of all shoppers, responsible for 58% of all spending on tax-free shopping
• Frequent: 13% of all shoppers but responsible for 20% of all spending on tax-free shopping
• Elite: 2% of all shoppers but responsible for 22% of all spending on tax-free shopping.[21]

1.19              The infrequent tax-free shoppers spend relatively low amounts on tax-free shopping. This leads HM Treasury to conclude, without presenting evidence, that “VAT refunds are less likely to be a significant pull factor for lower value purchases”.[22]  However, their own evidence actually shows otherwise.  In 2019 the 3.5 million visitors from the USA were the largest group of non-EU visitors (22%) but spent relatively little on tax free shopping, just 6% (in contrast the Chinese were 5% of all non-EU visitors and accounted for 32% of all tax-free shopping).  Yet HMRC’s survey of American tax-free shoppers in May 2020 showed that, despite low spending levels:

• 46% said tax-free shopping influenced their decision to come to the UK
• 58% said they spent more as because of tax-free shopping
• Tax-free shopping was 60% of their total spend
• 36% would either not purchase or reduce their spending if tax-free shopping was abolished
• 64% spent all or some of their saving in the UK[23]

Similarly, most Chinese shoppers are infrequent users yet in the same HMRC survey:

• 69% said tax-free shopping influenced their decision to come to the UK
• 56% said they spent more as because of tax-free shopping
• Tax-free shopping was 48% of their total spend
• 37% would either not purchase or reduce their spending if tax-free shopping was abolished
• 97% spent all or some of their saving in the UK

1.20              Of the other two groups of tax-free shoppers, the key point is that just 15% of all non-EU visitors are responsible for 42% of all tax-free shopping.  Elite shoppers spend on average 55,000 euros annually on tax free shopping and come from Greater China (40%); Southeast Asia (15%) Gulf states (14%); USA (6%); Russia (6%).[24] In 2019 the Chinese were the top retail spenders in the UK, accounting for 32% of all tax-free purchases and visitors from the six Gulf (GCC)[25] states were responsible for 26%.  What is remarkable is that although Chinese and Gulf state visitors between them accounted for 58% of all tax-free shopping, each group was relatively small at around 800,000 each, or just 5 % of the total non-EU visitors.  These figures are also reflected in air-side tax-free shopping sales.

1.21              The Chinese market is particularly important.  Already the biggest spending country, abroad the potential for growth is strong, with just 10% of Chinese people having a passport,[26] compared with over 76% in the UK[27] (and 54% average of 6 developed countries). In 2000 there were 10.5 million Chinese visitors worldwide.  This grew to 149.7 million in 2018 and (in 2019) was predicted to rise to nearly 400 million by 2030.[28] Chinese visitors are forecast to drive future growth in international visitor numbers and spending, and shopping is the main attraction for them.

1.22              It is clear that to be a successful, high productivity, international visitor destination, Britain needs to have a balance which includes low volume but high spending visitors.  Other countries and cities around the world have discovered that becoming a high volume, low spending destination is a damaging and unsustainable international visitor model.[29]

RECOMMENDATIONS

Recommendation One – The Government should recognise the importance of Britain’s retail, both as a motivator for international visitors to choose to visit the UK and as a major income generator, responsible for around 25% of all spending by international visitors.

Recommendation Two – The Government should appreciate the different types of international visitor and their importance to the UK economy and seek to create a more productive international visitor economy by continuing to attract low volume but high spending visitors as part of a balanced mix.

2.              Select Committee Question One -  What needs to be done to re-establish the UK as a holiday destination for international travellers? 

What should Government and the tourism boards be doing to support the inbound tourism industry in its recovery? 

2.1              AIR has identified three policy areas where positive action by the Government could enhance both the UK’s attractiveness of international visitors and maximise their level of expenditure. These are:

• Enhance the UK’s visitor visas – Britain’s visitor visa product has fallen behind that of the Schengen Area making the UK a less easy place to visit and spend.
• Reconsider the Treasury’s decision to end tax-free and airside tax-free shopping, based on an analysis of the full impact on the UK economy and jobs – since January 1st 2021 Britain is now the only European country not to offer tax-free and air-side tax-free shopping to international visitors, each year wiping out over £1.2 billion of retail sales alone and diverting spending in retail, accommodation, hospitality and entertainment away from the UK, specifically to France, Italy and Spain.
• Remove Sunday trading restrictions in the UK’s International Centres – restrictions on Sunday opening hours in England reduce the productivity of our International Centres and diverts up to £250 million of retail spending annually to other countries.  

Policy Area One - Enhance the UK’s visitor visa product

2.2               Paragraph 93 of the Tourism Recovery Plan states that “Digital transformation within visa services also allows the UK to remain agile to the needs of customers, both within and beyond the tourism sector. Digitisation and improvements to the customer journey continue to be a key part of the borders, immigration and citizenship system strategies within the Home Office. Across all sectors, UK Visas and Immigration’s ambition remains to provide a world-class immigration service; increasing digital capability to deliver improvements to customer experience within the visa service.”  While AIR supports this aim, we are concerned that the UK is becoming less competitive, particularly in relation to the Schengen Area member states.

2.3              Visitors from 114 countries and territories require a visa to enter the UK.  These include visitors from high spending states such as China and the six GCC states, sources of most high spending international visitors who can chose which countries to visit and where to spend their money.  These Chinese and GCC visitors also require a visa to visit the 26 Schengen countries.  It is important that the UK visa system produces the lowest possible barrier to entry while maintaining the security of Britain’s borders so that Britain is not perceived as being more difficult to visit than the 26 Schengen countries.  Given their importance to the international retail sector, this section focuses on the specific visa requirements of visitors from the GCC states and China.

GCC visitor visa requirements

2.4              Visitors from the GCC states need visas to visit the UK or a Schengen country.  Some states benefit from the Electronic Visa Waiver Scheme which allows certain visitors the right to enter without a visa, subject to securing a visa waiver. The UK’s Electronic Visa Waiver Scheme is available to visitors from four of the six GCC states but is now less attractive than the Schengen product and will become more so in 2022 when Schengen will further enhance its product.

2.5              The Schengen EVW can be applied for at any time and allows multiple entry during a six-month period. The UK equivalent is only single entry and must be applied for at least 48 hrs before departure. This makes it easier and more attractive for high spending visitors from GCC countries to fly, for example, to Paris rather than to London. At a round table that AIR held with ambassadors and embassy representatives from the six GCC states at the 2021 Conservative Party Conference, the diplomats stated that this issue was affecting the destination choice of many of their citizens to the detriment of the UK. The early results of the economic loss to the UK of more GCC visitors choosing to visit Paris rather than London is already showing, as is illustrated in para 2.16-2.17 below.

2.6              In 2022 the EU plans to launch a new European Travel Information and Authorisation System which will be valid for three years, multi-entry and cost just 7 euros. This will put the UK offer even further behind.

2.7              The British Government has always committed to matching the Schengen visitor visa system. Having accepted the principle of Electronic Visa Waivers for these states, it would be a cost-free measure for the Government to introduce minor changes to restore parity with Schengen.

Recommendation Three – The Government should enhance its Electronic Visa Waiver Scheme for visitors from GCC states so that it at least matches, if not exceeds, the new Schengen product.

Chinese visitor visa requirements

2.8              Most first-time visitors from China to Europe prefer to make a multi-country tour.  A Schengen visa allows them access to 26 European countries.  If they wish to include the UK on a multi-country tour, they must obtain a UK visa in addition.  The UK China Visa Alliance (now part of AIR) campaigned from 2013-2018 to enhance the visitor visa regime.  Its research (2014) found that only 6% of Chinese visitors to Europe obtained both a Schengen and UK visa.  9% obtained just a UK visa and 85% chose a Schengen visa.[30]  The research included opinion polling of Chinese tour operators who said that it was easier to leave the UK off a multi-country tour than to apply for a separate UK visa.

2.9              The then Home Secretary, Theresa May, launched UKCVA’s report and adopted most of its recommendations.  The key point in the report was that the Government should make it easier to apply for both a UK and Schengen visa at the same time. To this end the Home Office harmonised the paperwork and now accepts Schengen visa application forms to apply for a UK visa, effectively halving the paperwork required.  They also established a pilot with Belgium whereby applicants could apply for a Belgium (Schengen) and UK visa at the same time and place. David Cameron announced that the standard visitor visa in China would be for two years rather than six months, allowing Chinese visitors to add the UK to a European tour made within that period.  He stated that, if possible, the UK would follow the lead of the USA and Australia in introducing a 10-year visitor visa as standard in China, which would be far more effective in allowing multi-country tours without needing to apply for a UK visa for every trip.  Chinese visitor visa numbers have subsequently increased from 200,000 in 2013 to 800,000 in 2019, outstripping the growth in Schengen visas.

2.10              Although Chinese people have still not resumed international travel, and diplomatic relations have deteriorated in recent years, it is important to take a long-term view of how to attract back these high spending visitors.  The record numbers of Chinese students in the UK in 2021 (see 2.11) shows that the UK is still attracting Chinese people. We therefore suggest in Recommendation Four, below, three cost-free ways of harmonising the UK and Schengen application process to encourage more Chinese visitors

2.11              In addition, there is another way to encourage more visits throughout the whole UK by a specific group of high-net worth Chinese people.  The families of Chinese students studying in the UK are clearly wealthy to be able to pay fees (at an average of £22,200 per annum for three years)[31] plus travel and living costs. A simplified visa which allows entry for the whole time that their children are studying in the UK would encourage multiple trips.  In 2019/20 Chinese students were by far the largest group of overseas students studying in the UK with a record 139,130 out of a total of 538,615 (26% of all overseas students, up from 120,385 in 2018/19 and almost as many as the 142,985 EU student total).[32] The Chinese Embassy in the UK states that the number of Chinese students studying in the UK in 2021/22 has risen to 216,000.[33] The key thing is that these students are studying in Universities all across the UK and it is this that will encourage their parents to leave London and contribute to regional economies.

Recommendation Four - To build on the success of the earlier initiatives, the Government should consider further enhancements to the visitor visa regime to encourage more visits by high-spending Chinese people, such as:

• Introducing a standard 10-year visitor visa, as countries like the USA have done, for Chinese visitors, and as was proposed by David Cameron during President Xi’s visit in 2015.
• Expanding the joint Schengen/UK visa application process in China – currently a pilot with Belgium - to Schengen countries with larger numbers of visitors, such as France, Italy and Germany.
• Extending to China the Electronic Visa Waiver Scheme used in the Middle East.
• Introducing a visa for the families of international students studying in universities throughout the UK that lasts as long as the student visa to encourage parents to visit their children multiple times during their studies.  Parents of international students are likely to be high net-worth and have an additional reason for multiple visits to the UK.

Policy Area Two - Reconsider the Treasury’s decision to end high street and airside tax-free shopping, based on an analysis of the full impact on the UK economy and jobs.

2.12              On December 31st 2020, Britain ended both high street tax-free shopping (the VAT RES) and airside tax-free shopping, becoming the only European country not to offer tax-free shopping to non-EU visitors.[34] The Office of Budget Responsibility estimates that ending the VAT RES alone will lead to a drop of 38% in the (2019) £3 billion tax-free high street sales.[35] That direct loss of £1.2bn of retail sales (a structural loss of 7% of total non-EU visitor spending of £17.8 billion in 2019) will make it even more difficult to meet the Government’s ambition of returning international visitor spending to 2019 levels by 2023. The 2020 HMRC survey of tax-free shoppers clearly shows that ending tax-free shopping will have a negative impact on choosing to visit the UK and on their level of spending (para 1.19 and 2.25).  High value, highly mobile, price sensitive international shoppers choosing which European country to visit now have these offers:

2.13              In addition, there are also likely to be indirect losses as high-spending visitors travel to the UK less often and spend less time here, preferring instead to visit countries where they can buy goods for 20% less than in the UK. With non-EU visitors spending £17.8 billion in 2019, of which £3 billion was on tax-free shopping, the remaining £14.8 billion (spent on hotels, restaurants, travel, culture and entertainment) raised around £2.96 billion in VAT.  A fall of just 15% in this other spending (£440 million) would more than wipe out the estimated £400 million of VAT that the Treasury forecasts it will collect by ending the VAT RES, leading to a negative impact on VAT.

2.14              Both the OBR and HM Treasury have stated that they had not taken into account this indirect impact of ending high street and airside tax-free shopping when estimating the level of VAT they expect to raise from these measures. In effect, HMT has made an estimate of just the gross level of VAT it will be earning from (reduced) sales that were previously tax-free.  What they have not done is made an estimate of the net impact on VAT levels, taking into account the fall in VAT as a result of non-European travellers visiting the UK less often and spending less time and less money when they are here.

2.15              We fear that the net impact of ending tax-free and air-side tax free shopping will be a loss of VAT, not a gain. The damage to Britain’s international tourist appeal and our reputation as Global Britain will be done, but rather than resulting in a gain for HM Treasury, there is a strong probability that it will lead to a net loss of VAT. Industry also estimates a loss of 20,000 jobs throughout the UK as a direct result of ending tax-free and airport tax-free shopping (10,000 in high street stores, 5,000 in airports and 5,000 in manufacturing plants of British brands) and no estimate has been made about the number of indirect jobs lost in hospitality and tourism.

2.16              Early indications are that the industry’s fears are being realised.  Data on tax-free shopping in EU states in the last quarter of 2021 shows that, even with COVID-19 restricted travel, spending by Gulf state visitors is now at over 140% of the level of 2019, with an average spend of €22,000.  The evidence suggests that much of this increase has come from spending that would previously have been made in the UK.  VAT refund agency, Global Blue, looked at the three types of GCC shoppers in the EU, comparing their spending in 2019 with 2021.  This showed that:

• 50% of those shopping in the EU in 2021 had previously, in 2019, only shopped in Continental Europe.  Their spending has risen by 10%, from €20,000 in 2019 to €22,000 in 2021. 
• 30% of those shopping in the EU in 2021 had previously, in 2019, shopped in both Continental Europe and the UK.  Their spending in Continental Europe in 2021 has risen by 40% from €14,000 to €22,000
• 20% of those shopping in the EU in 2021 had previously, in 2019, only shopped in the UK.  In 2019 they spent an average of €25,000 in the UK and nothing in Continental Europe.  But in 2021 they spent €22,000 in continental Europe.[36]

2.17              These figures clearly show that spending that would have taken place in the UK is now being diverted to the EU. This example focuses on GCC visitors and illustrates the disproportionate impact that losing these visitors to EU competitors has on the UK economy. As stated in 1.9, in 2019 the 800,000 GCC visitors spent £2.6 billion in the UK.[37]  So, while accounting for just 5% of all non-EU visitors, they are responsible for nearly 15% of all non-EU visitor spending.  The average GCC visitor spent 3.8 times more than the average international visitor. Part of that spending has already moved from the UK to the EU countries as a direct result of ending tax-free shopping, together with associated (VAT-able) spending on hospitality, leisure, culture and travel.

2.18                These early findings are confirmed by Value Retail, owners of Bicester Village.  It states in its evidence to this inquiry that “since the abolition of the VAT Retail Export Scheme Value Retail (the owner and operator of the Bicester Village Shopping Collection 11 shopping destinations) have been tracking trends in the value of international tourist spending at Bicester Village and across our 8 other European villages. Though the imposition of restrictions on international travel have clearly influenced this measure, we have established that the adverse impact on international sales levels in the UK has been greater than in our European villages, where similar tax rebate schemes remain in place.”[38]

2.19              The ending of airside tax-free shopping threatens the financial viability of some of Britain’s regional airports since it used to contribute up to 40% of their revenues. This will damage a vital infrastructure element of the Government’s levelling-up ambitions. As a first example, despite forecasting a full-year profit before tax of approximately £151m – and even having already repaid the £73m received in furlough assistance to the Government – Dixons Carphone recently announced that it will permanently close all of its UK airport stores after 30 years in the travel retail industry, as a direct result of the removal of airside tax-free shopping. The Airport Operators Association is making a separate submission to the Select Committee on this issue and AIR fully supports their position.

2.20              The Government ended the two tax-free shopping schemes because it stated that, on leaving the EU, WTO regulations would mean that the scheme would have to be offered to visitors from the EU.  The Treasury was concerned about the potential cost of extending the scheme, which it stated could be up to £900 billion in lost VAT on tax-free shopping.[39] 

2.21              AIR believes that the decision made by HM Treasury to end high street and airside tax-free shopping was made on incomplete and uncertain evidence.  In evidence given to the Treasury Select Committee by the Office of Budget Responsibility, when asked whether it was confident in its estimates of the level of VAT likely to be collected as a result of ending tax-free shopping, the OBR official stated that “the fact that we gave it a highly uncertain ranking should tell you that we’re not particularly confident in any specific number.”[40]  The OBR stated that “there will also be costs as the UK becomes less attractive for affected tourists relative to alternative EU destinations such as Paris or Milan”[41] but admitted that its “assessment has not specifically considered the negative consequences for affected industries” such as hospitality, entertainment, culture.[42]

2.22              On the abolition of airside tax-free shopping the OBR states “The yield from this is again subject to uncertainty around the behavioural response. It is not clear how much of the tax rise will be passed through to the prices faced by consumers or the degree that any price rises will reduce sales.”[43]

2.23              The Chairman of the Treasury Select Committee subsequently wrote to the Chancellor seeking a full independent impact assessment into the ending of tax-free shopping, saying that the Treasury “doesn’t go into the wider impacts on tourism and the leisure sector”.[44]  AIR supports the call by the Treasury Select Committee for an independent assessment of the full impact of ending tax-free shopping, particularly based on four specific points.

2.24              Point One - The Treasury underestimates the number of visitors impacted.  The Treasury states that only 1.2 million visitors used the high street tax-free shopping scheme in 2019, fewer than one in ten non-EU visitors.[45]  But 1.2 million is not the number of users, it’s the number of reclaims made.  The total number of visitors impacted is far greater at around 4.5 million, nearly 30% of all non-EU visitors (three times more than HM Treasury estimates) and 45% of tourist and business visitors, at whom the VAT RES is largely aimed. This is because, first the number of tax-free sales was 1.5 million (only 80% are subsequently reclaimed) and secondly because most visitors travel in groups of family or friends (average of three), not as individuals.  As an analogy the Treasury is saying that, because one person pays for a restaurant bill for a table of three, the restaurant only served one customer – it didn’t, it served three.

2.25              Point Two - The Treasury misunderstands the impact on visitor behaviour.  The Treasury states that ending the schemes will have little impact on visitor behaviour, either in choosing to visit the UK or in their level of spending.[46]  We have pointed out (para 1.11) how the answer given by a Treasury Minister in the Lords stated that shopping was not a motivator used selected and incomplete evidence to downplay the impact of ending the scheme.  In addition HMRC’s own consumer survey of non-EU visitors into tax-free shopping (VAT RES) in May 2020[47] (referred to in para 1.19) showed that (verbatim conclusions from the report):

• “VAT RES does play a role in attracting overseas visitors to the UK, especially for China and India”
• “VAT RES is a strong influence in the decision-making process”
• “Experience of VAT RES appears to increase its influence on planning future visits to the UK”
• “VAT RES encourages tourists to spend more in the UK”
• “It accounts for more than half of spending for those who use it”
• “Around 36% would not have purchased all of the goods if the incentive was withdrawn”
• “Most spend all or some of their savings in the UK, with a trickle down into hospitality and entertainment services, as well as further spending in retail.”

2.26              In addition, HM Treasury looks at the average refund level without understanding the different groups of tax-free shoppers and the impact of ending the schemes on the behaviour of high-spending international visitors, as described in 1.18 above, for whom the refund was worth on average around €11,000.

2.27              Point Three – The Treasury overestimates the cost of extending the scheme to EU visitors.[48] The Treasury estimates that the cost of extending the VAT RES to EU visitors could be up to £900 million annually in lost VAT.[49]  In a letter to the Chairman of the Treasury Select Committee the then Exchequer Secretary to the Treasury clearly states that the estimated cost of extending the scheme to EU visitors was the main reason for deciding to end the two schemes. She states “The Office of National Statistics estimate there were substantially more EU visitors (24.8 million) than non-EU visitors (16.0 million) to the UK in 2019. This implies an extension of the VAT Retail Export Scheme to the EU could significantly increase the cost of the scheme by up to an estimated £0.9 billion. This would result in a large amount of deadweight loss by subsidising spending from EU visitors which already happens without a refund mechanism in place, potentially taking the total cost up to around £1.4 billion per annum.”[50] The Minister’s letter also cited the cost of extending the scheme to EU visitors as the main reason for ending air-side tax-free shopping saying “again, extending the relief to the EU would significantly increase the cost”. However, this assumes that EU visitors spend the same amount on shopping as non-EU visitors.  VisitBritain, using the ONS International Passenger Survey, states that non-EU visitors spend 2.6 times more than EU visitors overall, and retailers report that EU visitors account for only 10% of all sales (tax-free and taxed) to international visitors (see paras 1.14-1.16).  Taking the VisitBritain figures, that reduces the cost by two thirds of the Treasury’s figure to £300 million and using retail figures the cost is less than £50 million, both far lower than the HMT figure of “up to £900 million”.  The Exchequer Secretary’s Letter to the Chairman of the Treasury Select Committee ends by saying “The independent Office for Budget Responsibility will also set out their assessment of the fiscal impact at the next forecast in November“[51] but the Treasury then effectively excluded any independent assessment by the OBR of this key issue which determined the decision that Ministers made.

2.28              In evidence submitted to the Judicial Review of the decision-making process the senior HM Treasury official explained that the OBR would usually assess the impact of policy proposals in advance as part of the decision-making process. He then said “however the process for the `Decision' departed from this norm as the policy changes were not announced at a Budget or alongside an OBR forecast. Therefore, the Government was unable to know what OBR's `reasonable and central' view of the Exchequer Impact would have been before announcing the policy decision ……. Instead, the OBR-certified figures were necessarily published at a later date (25 November 2020) than would have ideally been the case. The OBR did not make any specific adjustments to their economy forecast as a result of the removal of the VAT RES and tax-free sales.”[52]  This means that the Treasury took the decision to end tax-free shopping based mainly on its estimate of the cost of extending it to EU visitors without having this key element independently assessed by the ORB.  And because HM Treasury’s decision excluded a policy of extending the schemes to EU visitors, the OBR was not subsequently remitted to examine the cost of that measure. So, this central issue was never independently assessed by the ORB, despite the Minister telling the Chair of the Treasury Select Committee that it would be.

2.29              Point Four – The Treasury fails to take account of the indirect costs of ending the schemes. As mentioned in 2.14, the Treasury and the Office of Budget Responsibility have both said that they have only considered the estimated net impact on VAT of ending tax-free or airside-tax-free shopping.  They have not considered the gross impact as spending by international visitors falls because they choose to visit less and spend less in the UK. 

2.30              Given the uncertainty over HM Treasury’s estimates and the potentially negative impact of the withdrawal of tax-free and air-side tax-free shopping both on British businesses and HM Treasury‘s tax revenues the government should work with industry to introduce an enhanced, digital tax-free shopping scheme immediately and a new airside tax-free concession for higher value items.

2.31              At the very least the Government should agree to the request by the Chairman of the Treasury Select Committee for an independent assessment of the full impact of this measure. Undertaking a full impact study has no downside for HM Treasury. If it demonstrates that the benefit to HM Treasury outweighs any loss, then there is no need for HM Treasury to change its policy. But if it shows that the net result is a loss of VAT then the Treasury can take action to prevent that from happening.  Businesses would be happy to contribute in any way to such a study.

Recommendation Five – The Government should work with industry to introduce an enhanced, digital tax-free shopping scheme immediately and introduce a new airside tax-free concession for higher value items and, at the very least, commission an independent assessment of the full impact of ending tax free shopping and airside tax-free shopping

Policy Area Three - Extend Sunday trading in the International Centres

2.32              Britain’s two International Centres – London’s West End and Knightsbridge[53] - compete with similar centres in cities such as New York, Dubai, Tokyo and Beijing. International shoppers are surprised to find that in London, stores have legally limited opening hours on Sundays, forcing them to open later and close earlier. The 1994 Sunday Trading Act limits stores over 250 m in England and Wales to open for no more than six consecutive hours between 10:00 and 18:00.  This makes the UK's International Centres less competitive. Even in Scotland, stores have no Sunday trading restrictions.

2.33              Closing stores at 6pm on Sundays detracts from the overall offer of the two International Centres. In the West End, theatres, cinemas, restaurants, and cultural establishments can and do open with no restrictions.  To the millions of international visitors this must seem a bizarre situation.  For people attending Sunday theatre matinees, the opportunity of then shopping is effectively closed to them.

2.34              The International Centres are qualitatively different from the rest of the UK. With the two International Centres now geographically defined in the London Plan, it is possible to add them to the existing list of exemptions in the 1994 Sunday Trading Act without having a wider impact on Sunday trading regulations throughout the rest of England.

2.35      New West End Company research, undertaken pre-COVID-19, estimates that this cost-free measure would generate an additional £250m in sales annually. This would support over 2,000 FTE jobs.  We would like to see this simple, one-clause measure included in a future growth Bill.

Recommendation Six – The Government should add the UK’s two International Centres to the list of exemptions to the 1994 Sunday Trading Act to allow Britain to compete better with other international retail districts

What will the impact on the UK’s hospitality, cultural and heritage sectors be if inbound tourism is slow to recover to pre-pandemic levels?

2.36              AIR concentrates on encouraging more spending by international visitors in the UK’s shops.  A large part of this is done by a small volume of international visitors, mostly from the GCC states and China although, as VisitBritain’s research shows, shopping is a motivator for 23% of all international visitors and is their largest single spending category (see section 1.8 and 1.9).  However, those visitors encouraged to the UK for shopping spend money in hotels, restaurants, entertainment, travel and culture.

2.37              With the UK becoming less attractive to international shoppers, particularly to high spending visitors, due to the visa regime, the ending of tax-free and air-side tax-free shopping and Sunday trading restrictions, we believe that these travellers will visit the UK less often and will spend less time in the UK when they do visit. This will result in reduced spending in the hospitality, cultural and heritage sectors.

3.              Select Committee Question 2 -  Does the Tourism Recovery Plan go far enough to support the industry’s recovery from the Covid-19 pandemic?  

What are the biggest challenges to delivering the plan? 

3.1              AIR believes that the decline in Britain’s attractiveness to international shoppers creates big challenges to delivering the Plan, particularly as high spending visitors choose to visit and spend their money in similar destinations but where the visa system is easier, they can shop tax-free and the shops stay open longer.  This undermines the goals in the Ministers’ forwards for seeing “international visitors spending more, staying longer, visiting throughout the year” and “that people continue to make the UK their destination of choice year after year”.

3.2              It also makes it more difficult to meet the Government’s aim to “recover inbound visitor numbers and spend to 2019 levels by 2023”.  The OBR has estimated that ending tax free shopping will reduce spending on previously tax-free items by 38%[54] suggesting a permanent loss of £1.2 billion, even before any indirect losses of spending on hospitality, entertainment and cultures as high spenders choose to visit less often and spend less time in the UK.

3.3              The decline in attractiveness also undermines the Government’s aim to “return the UK swiftly to its pre-pandemic position as a leading European destination for hosting business events” as competitor countries promote a more attractive package, particularly with the offer of tax-free and air-side tax-free shopping to attendees.

3.4              The Plan’s “Approach to delivery” seeks to “Stimulate demand across the UK, but particularly in parts of the country which are expected to recover slowest, such as ‘gateway cities’ like London, Birmingham and Manchester that disproportionately rely on inbound visitors, through measures such as promoting consumer confidence and marketing activity led by VisitBritain and VisitEngland.”  However, being the only European country not to offer tax free shopping undermines marketing efforts, particularly in cities like London, as its tourism promotion agency London&Partners point out where shopping forms the biggest part of visitor spending accounting for over 46% of all spending, more than accommodation (30%) and everything else (24% on travel, eating, culture and entertainment cost).[55]

3.5              While the Treasury is right that the majority of international shopping takes place in London and Bicester Village, the impact of ending tax-free shopping in cities such as Manchester and Edinburgh is significant to their local economies. In 2019 direct spending on tax-free shopping was around £92 million in Edinburgh, £60 million in Manchester and £32 million in Liverpool.[56]  Manchester and Edinburgh airports have direct flights from China.  Their Airports will also lose the attraction of and income from air-side tax-free shopping. Manchester benefits from Gulf state visitors drawn by a mixture of football and shopping, but the economic benefits from the latter element will now be reduced.

3.6              In 2020, in response to the Government’s decision to end tax-fee shopping and airside tax-free shopping, AIR sought reactions from tourism and business groups throughout the UK.  Here is some examples of responses:

• Marketing Manchester - “The visitor economy of Greater Manchester, which secures over 100,000 jobs, will be dealt a hammer-blow by this decision.”
• Birmingham Chamber of Commerce - “The abolition of the VAT Retail Scheme would be a major blow to our visitor economy. The proposal to remove the tax-free shopping scheme undermines a central pillar of Government policy – notably the desire to ‘level up’ the country and bring prosperity to all four corners of the country.”
• The North West Business Leadership Team - “Tax free shopping is not just a stimulus for us as an international retail destination. It is a crucial part of our visitor economy offer.”
• Essential Edinburgh - “Tax-free shopping is fundamentally crucial for Edinburgh city centre. On top of the existing challenges, the loss of tax-free shopping would be catastrophic for the city”[57]

3.7              AIR believes that without appreciating the importance of shopping as both a motivator to choosing to visit the UK as a major generator of tourism spending and adopting policies that diminish the UK’s attractiveness as a shopping destination, the Government has made it difficult to meet the aims of its Tourism Recovery Plan.

4.              Committee Question Three - What should the UK be doing to maintain its status as a ‘soft power superpower’ and further promote its culture and heritage on the global stage?

How can the UK capitalise on its exit from the European Union? 

4.1              On leaving the European Union, Britain had the opportunity to enhance its appeal as a destination for international visitors.  It had the opportunity of extending tax-free and airside tax-free shopping to EU visitors, making it more attractive to a market of over 360 million nearby EU citizens who could visit Britain to shop and reclaim their VAT.  In so doing they would spend on hospitality, culture and entertainment providing a big boost to the UK’s economy.  This would particularly benefit regions outside London and their regional airports, most of which fly only to and from Europe, supporting the Government’s Levelling-Up agenda.  Instead, the Treasury chose to end tax-free shopping rather than extend it to EU visitors.  Not only does this prevent the expected growth of EU visitor numbers and spend but, as explained in section 3 above, diminishes the UK’s attractiveness for visitors from the rest of the World. On the same day as Britain ended tax-free and airside tax-free shopping, France lowered its minimum purchase level for tax-free shopping from €175 to €100.

4.2              The corollary of this is that British visitors to EU countries can now shop tax free.  This diverts domestic spending to European countries.  Put simply, a British person planning to spend £20,000 on a watch in London can now do so in Paris and save £4,000, easily paying for the journey, hotel, restaurants, etc.  Even though there is still little travel by Britons to the EU, tax free spending is already running at €5 million each week, a loss of €260 million annually to the British economy, growing to much more when international tourism restarts.[58]

4.3              The UK can capitalise on its exit from the EU by restoring and extending tax-free and air-side tax-free shopping to EU visitors to increase Britain’s attractiveness to high spending visitors.

What are the biggest threats to the status of ‘soft power superpower’?

4.4              The Tourism Recovery Plan states that “International tourism has an important role to play in promoting the UK as a soft power superpower and achieving the government’s overarching international policy objectives set out in the Integrated Review of Foreign, Defence, Security and Development policy. The Tourism Recovery Plan will support the UK’s objectives of sustaining strategic advantage through science and technology by being the World’s Meeting Place for business events and will create strong people-to people links and familiarity with the UK’s values through cultural exchange and tourism. Soft power also enhances the UK’s ability to attract international business, research collaboration and students – and, ultimately, to effect change in the world.”

4.5              AIR agrees with this.  However, we believe that making Britain less attractive as a shopping destination may shift the allegiance of high spending visitors from the UK to nearby competitor countries, particularly France and Italy.    China and Gulf States are major investors overseas.  The UK Government is actively encouraging investment from the Gulf States.  But other Governments are also seeking international investors and we are concerned that diminishing visitor loyalty to the UK and deflecting it to France and Italy will weaken vital investment relationships and reduce Britain’s competitiveness when investment decisions are made.

4.6              In addition, British heritage brands, such as Burberry, Mulberry, Church’s Shoes, Johnstons of Elgin, are major contributors to Britain’s soft power.  Their factories are in regions throughout the UK such as the North East, Midlands, South West and Scotland.  Ending tax-free and airside tax-free shopping, and the resulting impact on sales is damaging to these important British fashion brands and undermining the Government’s Levelling-up Agenda.

January 2022

Paul Barnes

Chief Executive, AIR