The government’s removal of tax-free shopping is costing the UK £10.7b in lost GDP and deterring two million tourists a year, new research has concluded.

Following a recent economic study, the Centre for Economics and Business Research (Cebr) found that, if the traditional scheme which offered free shopping for tourists was restored, the exchequer would gain £1.56 in other taxes for every £1 refunded in sales tax to foreign visitors – demonstrating a clear overall benefit to public finances.

Hotelier Sir Rocco Forte, chairman of Rocco Forte Hotels (which helped to commission the new research), commented on the findings: “The chorus of criticism from business leaders of the ‘Tourist Tax’ has become deafening and a responsible government can ignore it no longer.

“The Treasury has asked for evidence that scrapping tax-free shopping has damaged the economy and deterred high-spending tourists.

“Not only have 350 leaders of some of Britain’s leading businesses and tourist attractions now signed a letter warning that valuable tourist revenue is being lost, we also have economic analysis showing very clearly that restoring tax-free shopping would boost the public finances and the wider economy.

“Far from costing £2b a year as the Treasury has claimed, the exchequer would actually benefit by £2.3b when wider tourist spending is taken into account.

“At a time when we are desperate for economic growth, a U-turn on this policy is urgently required.

“We now know that reintroducing a VAT rebate scheme would boost visitor numbers to the UK by two million a year – the UK simply can’t afford to go on driving these tourists into the arms of our rivals.

“As long as we leave the tourist tax in place, Paris, Milan, and Berlin can’t believe their luck.”

The additional generated revenue of the reinstatement of tax-free shopping would outweigh the immediate losses associated with sales tax refunds by £2.3b in 2023, the report states.

Cebr concluded that spending which would have been deemed ‘tax-free shopping’ is estimated to have stood at £6.6b in 2022, rising to an estimated £7.7b in 2023.

Assuming a 100% claim rate, £1.1b of this would have been returned to customers in the form of VAT refunds in 2022, rising to £1.3b in 2023.

On a per visitor basis, these VAT refunds would reduce the cost of a visit to the UK by approximately 4.2%.

Based on the elasticity of demand for international travel with respect to price, this cost reduction would have increased visitor numbers by 1.7m in 2022, rising to 2m in 2023.

Assuming that additional visitors have the same per visitor spend as existing visitors, visitor consumption would have increased by £1.4b in 2022, increasing to £1.7b in 2023.

Visitor spending patterns would also be impacted by the effective cost reduction. This would have produced further additional spending of £1.9b in 2022, rising to £2.2b for 2023.

The total increase in spending as a result of the scheme would have been £3.3b in 2022 – this additional spending would have fed into higher output levels via the tourist spending multiplier, which estimates how the money spent by tourists circulates in the economy.

This would have amounted to an increase in GDP of £9.1 billion in 2022, rising to £10.7 billion in 2023.

Brian Duffy, CEO of the Watches of Switzerland Group (which also helped to commission the report), added: “This evidence is even more compelling than I anticipated.

“It is simply irresponsible of the government not to give this full consideration.

“We are aware from our brand partners and published data that tourist spending is bouncing back in the EU in a way that is simply not happening in the UK, and this is all down to the absence of VAT-free shopping.

“Our economy needs sustainable growth and this report points to a significant growth opportunity from tourism.”

Increased tourism numbers would, ultimately, also have positive impacts on employment levels within the UK.

A fully-utilised tax-free shopping scheme would have supported an estimated 172,000 jobs last year, or 201,000 in 2023. These estimates include existing jobs and ‘new’ jobs.

Taking into account the UK’s tax-to-GDP ratio, the increase to GDP would have increased tax revenues by £3.1b in 2022, or £3.6b in 2022 – meaning the reintroduction of a tax-free shopping scheme would have a net positive effect on government tax revenues.

The additional revenues generated would outweigh the losses associated with sales tax refunds by £2b (2022), or £2.3b (2023), the report concludes.

Managing economist for Cebr, Sam Miley concluded: “This report highlights the scale of the economic opportunity presented by the reintroduction of a tax-free shopping scheme.

“By making shopping purchases cheaper, tax-free shopping schemes act as an incentive for tourists to visit the UK over other countries.

“During their stay these tourists engage in other activity beyond their retail purchases, bringing a range of economic benefits that will be felt not only on the high street, but right through the retail supply chain.”

The Treasury’s decision to scrap the VAT rebate scheme under Boris Johnson’s government has prompted backlash from both business leaders and politicians across the board.

The Daily Mail launched a ‘Scrap the Tourist Tax’ campaign back in April, with 90 leaders in the retail, hospitality, and tourism sectors signing an open letter to the Chancellor – organised by Sir Rocco Forte – which described the rebate removal as an “extraordinary own goal” for the UK economy.

Removal of tax-free shopping has effectively made the UK 20% more expensive than anywhere else in Europe, with every other EU country still offering the rebates to visitors.

This also means that more UK shoppers are opting to spend their hard-earned money overseas, with VAT rebates effectively covering the cost of travel, and the added benefit of a holiday thrown in.