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Harrods has urged the government to restore VAT-free shopping for overseas visitors (Image by Steven Iodice from Pixabay).

Chancellor paves the way to scrapping Tourist Tax

Office of Budget Responsibility will investigate whether benefits outweigh the costs of restoring VAT-free shopping for tourists.

Chancellor of the Exchequer Jeremy Hunt has ordered the Office of Budget Responsibility to conduct a cost/benefit analysis of restoring instant VAT rebates for shoppers visiting from overseas.

The so-called Tourist Tax means wealthy visitors from Asia, the Middle East and North America can claim back sales taxes, normally in the region of 20%, on goods if they shop in European Union hotspots like Milan and Paris.

Tourists shopping in the UK can claim back the VAT, but only if they courier them to their home countries, where import duties are often applied.

VAT rebates were axed as part of the Brexit agreement signed by then prime minister Boris Johnson in January 2020; arguably the easiest win negotiators on the Continent secured for their political leaders.

Liz Truss committed to restoring the rebates during her brief premiership, but that plan was abandoned when Rishi Sunak and Mr Hunt moved into Downing Street.

Retailers, hoteliers and other business leaders have campaigned for the restoration of VAT rebates, arguing that any money raised by the tax is more than wiped out by lost revenue as tourists choose to visit and shop on the Continent.

A report by the Centre for Economics and Business Research estimated the tax was costing the wider economy more than £11 billion per year as wealthy tourists divert to other European cities such as Paris.

Until now, the Treasury has insisted reinstating VAT rebates would cost over £2 billion, but has now charged the OBR with investigating whether the policy costs Britain more than it raises.

OBR chairman Richard Hughes says the original Treasury work failed to look at the impact of the tax on the wider economy.

If its study agrees that the Tourist Tax is costing the economy, and the Treasury, more than it brings in, the door could be open for it to be scrapped in next month’s Budget.

Mr Hughes says the original decision to drop VAT rebates was based on narrow analysis on impacts directly relating to goods previously eligible for a VAT refund, rather than any wider consequences.

Conservative MP Sir Geoffrey Clifton-Brown told the Daily Mail, which has been campaigning for the restoration of the rebate he was “very encouraged”.

“I would be very surprised indeed if when they look at it properly, with all the latest trading figures being submitted by shops and hotels, they do not conclude that it would be beneficial for the Treasury and the economy more generally to reinstate tax-free shopping,” he added.

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