Big mistake? Brexit, end of VAT a costly blunder for Chinese tourism in the UK

The allure of shopping in the UK is dimming for Chinese tourists. The country is losing its competitive pricing edge, primarily due to the withdrawal of the tourist tax refund policy. During China’s recent National Day holiday, an increasing number of Chinese tourists to Europe opted to visit Ireland, Italy, and France instead of the once-popular London, anecdotal evidence from travelers and experts suggests. One Chinese tourist, Zhai Yang, visited the UK, Italy, and Ireland with her mother during the Golden Week holiday, which ran from October 1 to October 7. The expenditure for the pair’s trip was 170,000 RMB (23,300), approximately 100,000 RMB (13,705) of which was allocated to luxury shopping. Lack of selection, luxury price incentives However, Zhai made all her luxury purchases, including a Chanel bag, two pairs of Chanel sunglasses, one Hermès bag, and three Hermès scarves, in Ireland and Italy. For Zhai, the UK no longer holds the allure it once had as a shopping destination. Shopping in Europe is becoming more attractive because of favorable pricing and tax refunds. “Since the UK's departure from the EU, tax refunds are no longer accessible, and the exchange rate has become less favorable. It doesn’t make any sense to do luxury shopping in the UK anymore,” Zhai says. “On the contrary, the euro offers an advantageous exchange rate. I can still receive a tax refund of approximately 11 percent to 12 percent,” she adds. “Despite potential exchange rate losses when refunding directly to Alipay, I can still receive around a 10 percent tax refund, which is akin to a 10 percent discount. This makes shopping in Europe much more cost-effective compared to the UK.” Even a visit to the UK’s renowned Bicester Village left Zhai disappointed. The lack of a diverse selection and high prices marred her shopping experience. For instance, a Samsonite suitcase, priced at £250 (2,241 RMB) a few years ago, had doubled in price. Zhai and her mother didn’t make any purchases that day. Zhai had previously visited the UK three on three occasions, the first time about 10 years ago, followed by trips in 2015 and 2017. “During my previous stays, tax-free shopping was available, and the exchange rate was favorable. I took advantage of the situation and did a significant amount of shopping in the UK, as luxury goods were considerably cheaper compared to my home country, but this is not the same case any longer,” she says. Abolishment of tax refund policy ‘a big mistake’ New research conducted by Oxford Economics and the Association of International Retail (AIR) estimates the UK is losing £750 million (921 million) annually due to reduced spending by Chinese tourists. This financial impact is attributed to the UK government's decision to eliminate tax-free shopping as part of its withdrawal from the European Union. According to Michel Phan, a professor of luxury marketing at Emlyon Business School in Paris, the decision by the UK government to abolish the tax refund policy for tourists is seen as one of its “biggest mistakes.” He believes the move has diverted tourist spending away from the UK towards EU countries like Italy, France, Spain, and Germany. Chinese tourists are particularly affected by this change. “For example, when a Chinese tourist buys a 2,000 euro handbag in Paris, they get 240 euros back in a tax refund when leaving Europe. If you multiply that by several products bought here and there, the tax refund can easily pay for the airfare from China to Europe. Why would any Chinese tourist miss this opportunity?” Phan says. “The next issue the UK needs to be aware of is that Hainan Island in China is becoming a tax-free shopping paradise for Chinese consumers on their doorstep, without having to fly for 14 hours to come to Europe,” he adds. Joss Croft, CEO of UKinbound, a trade association that represents over 400 British tourism businesses, acknowledges the negative impact of the removal of the VAT Retail Export Scheme on international visitors' desire to visit the UK. “That’s why we have been working closely with colleagues across the industry to ask our government to review their own figures,” he says. “We understand that all the evidence and data on the Retail Export Scheme is currently being reviewed by the UK government, so we are hopeful that we might see a change in the near future.” The Tax-Free Shopping scheme, which allowed non-EU visitors to reclaim VAT on their purchases, was terminated in January 2021, making the UK the only European country without a tax-free scheme for international visitors. Although the government planned to reintroduce the policy in 2022, it was abandoned due to concerns raised by HM Treasury, which estimated tax-free shopping would cost the country £1.3 billion (1.6 billion) in lost tax revenue in the fiscal year 2024/25, growing to £2 billion (2.46 billion) in 2025/26. Contrary to these estimates, the AIR report found that the projected costs were overstated and that reintroducing the scheme would attract an additional 1.6 million visitors to the UK, resulting in a boost of £2.8 billion (3.44 billion) in tourist spending. In 2019, the UK welcomed over 880,000 visitors from China. These travelers stayed an average of 16.33 nights and spent approximately £1,937 (2,379) per person, according to VisitBritain. This significant expenditure positioned China as the second most valuable inbound travel market for the UK in terms of spending. Chinese consumers have become price-conscious Ling Aiqing, assistant professor of marketing at UCD Michael Smurfit Graduate Business School in Dublin, says: “The UK's decision to terminate the VAT refund scheme for international tourists has unquestionably reduced its allure for Chinese consumers. While this consumer base is often cited for its robust purchasing power, we must not overlook their pronounced sensitivity to pricing.” “The UK's decision to terminate the VAT refund scheme for international tourists has unquestionably reduced its allure for Chinese consumers. While this consumer base is often cited for its robust purchasing power, we must not overlook their pronounced sensitivity to pricing.” Take, for example, Burberry's iconic Kensington Heritage Trench Coat. The UK was once the most affordable global market for this item. However, its current retail price has surged to £1,890, or approximately €2,190, surpassing even Ireland's retail price of €2,150. “When you factor in Ireland's 13 percent VAT refund, Chinese tourists would effectively pay €1,870 for the same product,” Ling says. “For high-ticket items such as handbags, watches, and jewelery, the fiscal impact of these refunds becomes even more pronounced. This widening price disparity is clearly putting a damper on the enthusiasm of Chinese consumers to shop in the UK.”

Big mistake? Brexit, end of VAT a costly blunder for Chinese tourism in the UK

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Published October 25, 2023

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Big mistake? Brexit, end of VAT a costly blunder for Chinese tourism in the UK