Written evidence submitted by Walpole

 

 

Walpole submission in response to the DCMS Select Committee’s “Call for Evidence: Promoting Britain Abroad”.

We refer to the request for evidence issued by the Digital, Culture, Media and Sport (DCMS) Select Committee on Promoting Britain Abroad on 8 November 2021. This submission sets out Walpole’s response to the DCMS Select Committee’s Terms of Reference.

About Walpole and the British Luxury sector

Walpole, the official sector body for UK luxury, counts more than 270 British brands in its membership. Each of these is spread across all sub-sectors of the luxury industry (automotive, beauty & fragrance, food & drink, hospitality & services, jewellery, interiors, property and retailers) from small and medium-sized enterprises (SMEs) to internationally owned and publicly listed companies.

Luxury is one of the fastest growing and most successful industries in the UK. It represents the highest standards of creativity, innovation and quality. Prior to the pandemic, the British luxury sector was worth £48 billion to the UK economy, growing at a rate of 9.6% annually and employs 160,000 people throughout the UK in long-term, skilled and sustainable jobs throughout all of the nations and regions and is a major driver of tourism to the UK[1].

The Tourism Recovery Plan aims to drive economic recovery back to 2019 levels by 2023, two years ahead of economist’s predictions. Our conjecture is that if the allure of high-end British retail and high-end British brand experiences was recognised, and if three simple stimuli were included (improved visa access for high value visitors, the introduction of a possibly short term tax free shopping scheme to replace VAT Res whilst the UK is in post pandemic recovery, and the relaxation of Sunday trading for London’s designated international retail areas), we would be able to hit this target for international visitors by ensuring that there was a level playing field versus Continental Europe. This would allow the UK’s natural and cultural advantages to shine and therefore allow us to maximise wallet share of the international visitors who can contribute most to the economic recovery.

 

In the context of promoting Britain abroad, luxury adds particular value to the UK in two key areas:

 

  1. Our export success and flying the flag

The UK’s high-end cultural and creative industries are strongly export orientated, promoting Brand Britain in key export and inbound tourism markets globally. Exports in 2017 accounted for 80% of total sales or £38.5 billion in value terms. High-end sector exports account for 9% of the UK’s total merchandise exports and our largest export markets are the EU (42%), North America (23%) and China (11%) with Other Asia, including Japan and Korea, representing 9%.

  1. Driver of high-value tourism and shopping tourism

The high-end creative and cultural industries make significant contribution to the British tourism and travel industries through the international appeal of its luxury brands, hotels, restaurants and cultural experiences which are highly influential in attracting visitors to the UK.

The rise of Shopping Tourism (particularly for luxury goods) is well documented, and the value of sales of high-end goods to non-UK resident customers which was around £4.5 billion in 2017.[2]

Prior to the pandemic, non-EU tourists were key contributors to the UK economy, spending £17.8bn. They made up 30% of the visitors but accounted for 60% of the spend. According to data from Visit Britain shopping is a key activity during their stay (57% of visits in the UK involve shopping) with a total spend of £6.5bn, of which more than 50% was done using the tax-free scheme (VAT RES), when it was in place.

In addition to shopping, non-EU tourists of course spend on hotels, attractions, cultural experiences and dining and their spend amounts to £14.3bn, attracting £2.86bn VAT.

 

1. 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? 

Overarching recommendation

Walpole’s overarching recommendation is to recognise the importance of high-value retail and retail experiences in driving tourism recovery. Currently, the Tourism Plan makes no mention of the value of retail in attracting domestic and international tourists and the significant wider benefits of thriving high-end retail sector to the travel and tourism industries.

Policies to achieve key recommendation:

Tax-Free Shopping

Since the Government abolished the VAT RES and Airside tax-free shopping scheme from January 1st, 2021, the UK is now the only European country not to offer tax-free shopping to non-EU visitors. This severely impacts our appeal to international visitors and hinders our potential recovery from the pandemic.

The British luxury sector and businesses across the UK have been calling for the re-introduction of tax-free shopping incentives for international tourists. This is a matter of urgency, even with travel restrictions placed on travellers as a result of the pandemic. The VAT Retail Export Scheme (VAT RES) had been highly successful for the UK, ensuring that it remained competitive as a shopping destination, directly attracting over 600,000 non-EU visitors each year, and encouraging millions of others to shop more in the UK once they arrived. The scheme and the British luxury sector worked hand-in-glove as a calling card for Global Britain.

The removal of the VAT RES (Tax-Free Shopping) has already had a huge impact on the UK’s appeal to international visitors and has bought with it considerable challenges to our industry’s recovery from the pandemic. Research from Frontier Economics, supported by evidence from Walpole members, has shown that international shoppers are extremely price sensitive and mobile – quickly willing to defer their spend to other destinations in continental Europe to take advantage of preferable pricing[3]. Even with the limited travel the removal of the scheme is already clearly disadvantaging the UK in favour of other international tourist destinations as evidenced in the brand examples below.

 

Brand Examples 

A leading fashion brand and UK manufacturer reports that pre-pandemic 50% of their sales in the UK were through the VAT RES scheme. They are already seeing their international customers diverting their trips and spend to European countries that continue to offer tax free shopping. Fewer Americans and Middle Eastern customers are travelling to the UK to shop, choosing instead to go to France or Italy, and Chinese clients they have spoken to plan shopping on the continent instead when travel resumes. For this business the recovery in sales to tourists in Europe is already 20% ahead of the UK which they directly attribute to the loss of tax-free shopping in the UK.

A leading retailer reports that data suggests that while international travel was improving globally in 2021 (until the very recent emergence of the Omicron variant), these customers are not returning to the UK in the same numbers due to the loss of VAT RES, the removal of which also hinders their ability to engage with this high-value customer group. The wider impact of this loss to the UK economy will be felt across every sector of the hospitality, cultural and retail industries. While they are hopeful for the return of international trade overall, the removal of VAT RES is a substantial hurdle to the UK’s recovery.

The impact of removing the scheme is further deepened by countries in Asia increasing the areas in which tax-free shopping is offered domestically. For example tax-free shopping schemes available in South Korea and Japan are a major factor in bringing Chinese visitors to both markets. Over 50% of all till receipts in Ginza, Japan, are on Chinese credit cards. Tax-free shopping destinations such as Hainan in China are also seeing +300% growth such is the appetite for Chinese customers to be able to shop tax-free while international travel is still limited.

We also see evidence that European shoppers are as price sensitive as their Asian counter-parts - we should be keeping and extending the existing scheme to include them. Furthermore, the UK is already starting to lose its own domestic tourists who are being actively targeted by French, Italian and Spanish marketing campaigns to take advantage of tax-free shopping in other European cities.

Visitor Visas

The UK visitor visa regime has fallen behind that of Schengen both in its offer and application. The Government should:

Sunday Trading

Restrictions on opening hours on Sundays for stores of over 250 m sq. put London’s two International Centres at a disadvantage since stores in most of our international competitors face few or no restrictions.

With the two International Centres now geographically defined in the London Plan, the Government should add them to the existing list of exemptions in the 1994 Sunday Trading Act (which will not have a wider impact on Sunday trading regulations throughout the rest of England).

 

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?

International tourism supports businesses and jobs throughout the UK – providing a strong bedrock for the Government’s levelling up agenda, contributes to sustainable, long-term economic growth in the British luxury and high-end sector; drives capital investment, investment in skills, and helps the UK nurture its position as a global shopping destination underlining the message that the UK is open for business. 

While the pandemic has, obviously been negative for inbound tourism, it is ultimately, a one-off situation, whereas the decision to remove tax-free shopping has intentionally and structurally diminished the UK’s ability to attract tourism for the long-term with far reaching consequences for businesses which span hospitality, cultural and heritage sectors. VAT RES must be reintroduced and extended to EU visitors to ensure that the UK remains competitive with other global shopping destinations.

The decision to abolish the VAT RES scheme doesn’t simply damage London businesses and jobs, it damages the whole UK leading to:

          inhibited economic growth

          the death of many businesses that - until the pandemic - were highly sustainable and could return to growth with a return of international shoppers when travel restrictions lift

          skills loss at a time when the UK should be capitalising on the homegrown businesses that rely on a work force that has been nurtured and developed over decades and should be cherished.

          a contraction of international investment into the UK from European brands impacting on jobs and the allure of the UK to international shoppers

          impact on the UK’s reputation on the world stage

          regional job losses leading to further inequality

          impact on regional manufacturing hubs and the network of SME suppliers of materials

The loss of these overall tourist sales and associated spend with hospitality businesses, cultural institutions and lost sales on non-VAT goods will far exceed any perceived loss of reclaimed VAT.

Threat to SMEs and skills loss

Smaller, independent British brands – particularly those that manufacture in the UK and do have overseas operations to offset the loss of UK tourists and sales – will be adversely negatively impacted, leading to job losses within businesses already facing the very real struggles that the pandemic brings. For the many businesses that employ highly skilled craftspeople who have built skills over decades for, in some cases, generations, the impact will be permanent.

Contraction of investment and impact on jobs

Businesses in the British luxury sector estimated to Walpole that they would no longer be able to support 15 of jobs throughout the UK once VAT RES had ended, such was the draw of the price benefit, and the ability for shopping visitors to incorporate trips to all parts of the UK for further retail, hospitality, and cultural experiences.

Following news that VAT RES was to be abolished, 19 brands reported to Walpole that, over the course of the next five years, they would reduce planned capital expenditure by £1 billion due to a reduction in sales.

London has the highest density of luxury brands of any shopping destination in the world, which is one of the many factors in the UK’s appeal to high-spending international visitors[4]. This density will decrease with the loss of international visitors – British and international brands will simply chose to invest in store networks in other global cities where they are able to see the necessary return on investment.

Regional job losses

Ultimately, these impacts will have long-term consequences for regional communities – our members employ highly skilled manufacturing in Elgin and Speyside, Yorkshire and Lancashire, Staffordshire, Northamptonshire, and Somerset amongst others. The impacts will extend beyond these communities. London – the shop window for British luxury - and other urban centres will be impacted. International shoppers will be less inclined to visit.

The British luxury sector supports over 160,000 sustainable jobs throughout the UK. A reduction in profits or a shift in focus away from the UK will lead to job losses in the UK and a reduction made in investment in people.

Reputational impact

The impacts on UK plc’s reputation will be profound if more is not done to attract international visitors, particularly high-net-worth visitors, and this sector will continue to suffer long after the demise of the pandemic. Crucially, the luxury sector’s ability to maximise returns to the Exchequer at a time when the country needs to bounce back.

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

The Tourism Recovery Plan does not go far enough and nor does it recognise the valuable role the luxury sector plays as a key driver of tourism recovery.

Prior to the pandemic, the British luxury sector was growing at a rate of nearly 10% per annum, double the growth of GDP. With the right support, particularly and crucially in attracting high spending visitors back to the UK, it will help the UK bounce back from the pandemic.

Government policies currently serve to make London a less attractive global destination for international visitors than, for example, Paris or Milan whereas British luxury brands are actively investing in creating and enhancing tourist attractions and experiences.

Brand case studies

Wedgwood invests heavily in its visitor attraction, established to encourage a deeper engagement with customers by offering shopping, dining, hands-on learning experiences, unique events, picturesque woodland and the V&A Wedgwood Collection. 

Scottish cashmere producer Johnstons of Elgin provides another compelling reason to visit Speyside with its Cashmere Visitor Centre.

The whisky sector has exemplified how to expand whisky tourism. There are more than 130 operational distilleries in Scotland and the demand for whisky-related tourism was growing steadily before the pandemic. In 2018, Diageo announced that it was investing £150 million in whisky tourism projects to promote Johnnie Walker and its supporting distilleries. A substantial portion of Diageo’s investment went to its facility Johnnie Walker Princes Street in Edinburgh. The Macallan Distillery Experience in Speyside is an important visitor draw for the region offering unique visitor experiences.

Despite their investment to attract visitors, whisky brands have been hit doubly hard by both the withdrawal of VAT RES and duty-free changes meaning that those returning to Europe can only take one litre of spirits back with them unless they pay the VAT in their destination country. One distillery reports that high spending Americans have been turning down purchases because they cannot claim the VAT back which resulted in lost sales of well over £100k in one weekend because of the VAT redemption being cancelled.

The United Kingdom is at risk of facing a self-inflicted disadvantage to its peers at this time. The opportunity for this Government is to establish an alternative tax incentive scheme (across airside and high street) which not only champions the UK as an attractive destination for visitors but also which commits to truly supporting British businesses here at home.

- What are the biggest challenges to delivering the plan? 

As identified above, the biggest challenge to delivering the plan lies in the fact that the UK abolished VAT RES. As a result, the UK is no longer competitive on the world stage. Likewise, the UK’s visitor visa scheme needs to be overhauled.

Britain is now the only European country that does not offer tax-free shopping to visitors from outside the EU. The OBR estimates that this will lead to a drop of 38% in retail sales to non-EU visitors compared with 2019. That direct loss of £1.2bn of retail sales makes it even more difficult to meet the Government’s ambition of returning international visitor spending to 2019 levels by 2023.

However, 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 VAT on spending by non-EU visitors totalling over £3bn in 2019, the initial £350 million that HM Treasury expects in additional VAT will be lost if spending in other areas (such as hotels, restaurants, travel, culture and entertainment) falls by just 10%.

At Party Conference Round Tables, held by the Association of International Retail (AIR) in October 2021, Walpole saw new consumer research on visitors from China and the Gulf States. In 2019, visitors from these two regions formed just 4% of all international visitors to the UK (EU and non-EU) but were responsible for around 60% of all tax-free shopping spending. This high level of spending was also reflected in their spending on hotels, restaurants, culture, travel and entertainment. The research showed that over 50% of Chinese visitors and over 60% of visitors from the GCC would reduce the number of times they visit the UK and the length of time they spend here as a direct result of ending tax-free shopping. This reflects the findings of HMRC’s own consumer survey that was revealed during the recent Judicial Review.

Both the OBR and HM Treasury have stated that they had not taken the indirect impact of ending tax-free shopping into account when estimating the level of VAT they expect to raise from this measure.

We fear that the impact of ending tax-free shopping will be a net 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.

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.

With the reopening of international travel, the Government has a real opportunity to attract high-spending visitors and also divert sales away from the EU with a genuinely competitive tax-free shopping regime.

In addition, with the UK leaving the EU, British visitors to EU countries can now shop tax-free. Early data indicate that many high spending British shoppers are now spending in Paris and Milan rather than London, particularly on large purchases.

Data from Global Blue Ltd shows that the overall average spend per tax-free form issued to UK residents is €1,200. Overall, UK residents are spending around €5.1m on tax-free shopping per week. Top three countries benefiting are:

          France 35% share

          Italy 23% share

          Spain 15% share

The Government’s decision to end tax-free shopping (rather than extend it to EU visitors) has made London less attractive as a global city, not just to international visitors, but also to UK shoppers.

Visas

The second biggest challenge to the Tourism Recovery Plan lies in the UK’s visitor visa product. It is falling behind that of the Schengen Area. In terms of spending by international visitors the Electronic Visa Waiver Scheme available to visitors from four of the six GCC states is now less attractive than the Schengen product.

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 to Paris than to London. This issue is affecting the destination choice of many of their citizens.

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.

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 these minor changes to restore parity with Schengen.

In addition, there are a number of other cost-free changes to the visitor visa system that would help boost the UK's attractiveness to high spending visitors such as:

          Extending the Electronic Visa Waiver Scheme to other high spending markets, for example, China.

          Introducing a standard 10-year visitor visa, as countries like the USA have done, for Chinese visitors, and as was promised by David Cameron during President Xi’s visit in 2015.

          Introducing a visa for the families of international students studying in 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, but the current limited visitor visa acts as a barrier.

          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.

3. 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?  

Firstly, by continuing to ensure we have an opportunity to showcase the amazing breadth of creativity and international allure of British talent. Tourists tend to favour domestic brands when they travel, meaning British brands are disadvantaged in Europe. London is often the initial pull for visitors due to the high concentration of experiences, but it serves as a launch pad to visit the rest of the country.

Secondly, British luxury’s export-orientated nature mean that our brands naturally serve as soft power ambassadors for the UK through their quality, creativity and desirability. Creating a favourable, competitive and smooth export environment for British luxury businesses will symbiotically enhance the UK’s soft power on the global stage.

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

With the reopening of international travel, the Government has an opportunity to attract high-spending visitors and also to divert sales away from the EU with a genuinely competitive tax-free shopping regime.

Brexit afforded the UK with an opportunity to become more competitive than the rest of Europe on a number of levels especially though the negotiation of FTAs which British luxury businesses are ready to capitalise on.

The British luxury sector is adept at investing in visitor attractions to maximise the draw of international shoppers – extending and building on the allure of the provenance of British luxury goods. It has provided a bedrock upon which the UK can build both in terms of its allure, its reputation abroad, and the breadth and range of visitor attractions that it provides in terms of hospitality, cultural pursuits and shopping experiences.

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

The UK has all the ingredients to become a soft power superpower but is held back by a number of key Government decisions, specifically, VAT RES, Visa restrictions and Sunday Trading. Addressing these issues, and helping exporters through FTAs and other measures will lead to success. Britain’s soft power is an incredible asset and took centuries to build. Once lost, it will not recover.

 

 


[1]WALPOLE, Economic Contribution to the UK and Policy Recommendations – High-End Cultural & Creative Industries, June 2019

[2] WALPOLE, Economic Contribution to the UK and Policy Recommendations – High-End Cultural & Creative Industries, June 2019

[3] Frontier Economics, Responsiveness of the Demand for Luxury and High-end Products to Price Changes, November 2020.

[4] CBRE, Luxury & Location Report, February 2018