What is the ‘tourism tax’ said to be damaging London’s economy and how might it change?
Prime Minister Rishi Sunak has said he will listen to calls to scrap the “tourism tax” that critics say is damaging London’s economy.
Businesses in the capital are calling for the government to reinstate a VAT refund for overseas visitors in order to encourage tourism. Critics have argued that wealthy tourists are travelling to cities like Paris instead as a result.
The PM’s official spokesman said: “We are always happy to listen to the sector about their concerns and obviously we will respond accordingly.”
How did the VAT refund for overseas visitors work?
Up until January 2021, visitors to the UK from outside the EU were able to get a VAT refund on their shopping. VAT, which stands for value-added tax, is a 20 per cent sales tax charged on items in the UK. Non-EU visitors used to be able to present a VAT-receipt at the airport to claim their refund. This scheme has since ended, though customers are still able to buy items VAT-free in store if they send them directly to their home overseas.
The VAT paid by visitors to the UK is different from how tourist tax works in other cities. For example, Manchester introduced a tourist tax in April, which charges visitors to the city £1 per night for hotels and similar accommodation. The hope is that this tourist tax could raise millions of pounds for the council, and that the money could be used to boost the tourism economy.
Why did the VAT refund scheme end?
The VAT refund scheme ended in 2021 after the UK left the EU, as part of a post-Brexit consultation about taxing items transported across borders for personal use.
Kwasi Kwarteng reintroduced the tax-free shopping scheme as part of his mini-budget, but Jeremy Hunt reversed the decision when he became chancellor, claiming it was unaffordable.
At the time, retail bosses described Hunt’s decision as a “hammer blow to UK tourism and the British high street”.
Mr Hunt argued that by not introducing a new VAT-free shopping scheme, the UK could generate more than £1 billion in 2024, and more in subsequent years, as reported by Forbes.
However, a report by the luxury trade association Walpole found that tax-free shopping generated more than £3 billion a year for the UK as well as wider economic benefits.
How might things change in the future?
London mayoral candidate Daniel Korski has proposed introducing a tourist tax on hotel rooms in London, in a scheme similar to the tourist tax in Manchester.
Mr Korski has proposed introducing a “£1 or £2” tax to raise extra funding for the Metropolitan police.
He said: “There is a real sense there is not enough police on the streets. I don’t think £1 or £2 more on your hotel bill means you are going to go to Paris instead of London.”
Introducing a tourist tax was also proposed by the London Finance Commission, an expert body set up by London mayor Sadiq Khan.
Meanwhile, hundreds of London firms are urging the Government to restore tax-free shopping for overseas tourists.