By Ruth Bloomfield
The U.K. risks losing its status as a premier shopping destination after a popular tourist tax break expires, posing a new threat to retail property owners already whipsawed by the pandemic and Brexit.
Starting in January, foreign visitors will no longer be able to reclaim a sales tax of 20% for items bought in the U.K. for 30 British pounds -- equivalent to about $40 -- or more.
Business leaders worry that tourists could abandon London for other European shopping destinations such as Paris and Milan. Across the rest of Europe, tax refunds on shopping remain the norm. Non-European Union travelers can reclaim up to 20% of their spending in France and 22% in Italy.
Retail sales this year in London and other parts of the U.K. have already suffered from a drop in foreign visitors because of the coronavirus pandemic, plus two lockdown periods during which all but essential stores have been forced to close. Now, the fear is that even after Covid-19 comes under control, Britain's higher taxed products will make it less appealing as a global shopping mecca.
"I thought that the point of Brexit was that we were going to become more competitive," said Jace Tyrrell, chief executive of the New West End Company, which represents some 600 businesses in central London, including Nike Inc., Apple Inc., and Ralph Lauren Corp. "This is going to affect not just London but regional cities like Edinburgh which rely on tourists."
The owner of Heathrow Airport is leading a legal challenge against the decision. In papers filed last month in the British High Court, the airport owner alleged the tax-refund repeal miscalculated the level of potential savings, and that the government failed to fully consult those who will be affected by the decision. Brexit triggered the move to end the refund.
The U.K. government needs the money. The National Audit Office, which monitors public spending, calculates that GBP210 billion was spent on health care and support for employees and businesses during the first six months of the Covid-19 crisis.
The government wouldn't comment, but officials have previously described the tax-refund system as "a costly relief which does not benefit the whole of [the U.K.] equally, with current use of the scheme largely centered in London."
Early tourist feedback is setting off alarms. A recent survey found 70% or more of visitors from the Far East and Middle East are less likely to visit the U.K. More than 60% from the U.S. said the same, according to the poll of 3,000 tourists by Global Blue, a tax-refund company.
The British retail-property sector has been rattled for years by the rise of online shopping, Brexit, and now by the pandemic. The KPMG/Ipsos Retail Think Tank retail health index, which measures demand, margins and costs across the retail sector, plunged to an all-time low in the second quarter. The U.K.'s exit from the European Union could further undermine business if it means fewer European tourists visit.
Retail intelligence firm Springboard forecasts U.K. shopping destinations will see overall foot traffic for the six weeks to Boxing Day (Dec. 26) plunge by 62% compared with the same period last year.
The British business community hasn't given up. In a letter to Britain's chancellor of the exchequer, company executives warn that the decision would be a self-inflicted wound.
"Britain will now be the only country in Europe not to offer tax-free shopping to international visitors," it reads. "We fear that the message this decision sends is effectively telling international tourists...to go anywhere but the U.K. to spend their money."
Hotels and restaurants could also feel the pinch, they warn. But retail property owners like Scott D. Malkin, chairman of Value Retail, which owns a string of shopping outlets, are expected to be among the hardest hit.
Mr. Malkin comes from a real-estate family -- his brother Anthony Malkin is chief executive of the company that owns the Empire State Building -- and he brought the concept of designer discount malls to the U.K. in 1995.
He developed Bicester Village near the city of Oxford. The outdoor mall was designed to resemble a traditional village main street, and offers brands like Gucci, Burberry and Balenciaga at sharply reduced prices. The project has been a hit. In 2019, more than two-thirds of the 7.3 million people who visited Bicester's 160-plus stores were tourists.
Mr. Malkin declined to comment. But Richard Lim, CEO of independent consultants Retail Economics, suggested the end of the foreign tax exemption would hurt destinations like Bicester Village.
"Tourists play a significant role in the prospects of particular parts of the retail sector -- particularly across luxury goods -- and across city centers and retail destinations like Bicester Village," he said. "The long-term implications I think will be negative."
Some business leaders, such as Selfridges managing director Anne Pitcher, say the new rule will also be a job killer.
"People don't just shop when they come to the U.K. -- they stay in hotels, eat, travel and visit cultural institutions, and businesses across the country will be severely impacted by the removal of the scheme," she said.
(END) Dow Jones Newswires