UKFT explains why one of our key policy asks is the reinstatement of the UK VAT Retail Export Scheme (VAT RES) due to its critical importance for fashion and textile manufacturers, brands and suppliers across the UK.

The UK Government’s refusal to reinstate the VAT rebate scheme for international shoppers is a classic case of policy driven by flawed modelling and short-sighted thinking. Officials continue to claim that restoring tax-free shopping for overseas visitors would be a net loss to the Treasury. But this stance is rooted in economic modelling that ignores core principles of behavioural economics, international competitiveness and sectoral impact – leaving the UK out of pocket, out of step with global rivals and increasingly out of favour with high-spending tourists.

The need for a change of policy is all the more acute this year as the EU prepares to attract and welcome a substantial increase in affluent shoppers following the trend to spend their money in Paris, Milan, Berlin, Madrid and other EU capitals. These US shoppers, in particular, will be looking to purchase goods which are more expensive in  the US as a result of the US President’s Additional Tariffs and like the rest of the world they will no longer be looking to London and the rest of the UK for the majority of their investment.

A narrow fiscal lens

The Government’s core argument for not reinstating a UK VAT refund for non-residents hinges on HM Treasury analysis suggesting that a VAT rebate would reduce tax revenue by over £2 billion annually. But this headline figure is deeply misleading. The model assumes a static economic environment – one in which tourists’ spending habits remain unchanged regardless of the incentive to spend more or less in the UK. At UKFT, we believe this is a fundamental error.

The reality is that VAT rebates directly influence tourist behaviour. The removal of tax-free shopping in 2021 immediately made the UK the only country in Europe where international shoppers – particularly those from high-spending markets like the US, China, and the Gulf – cannot reclaim VAT on goods they buy in UK stores. Tourists are not passive participants in the global economy; they are consumers with choices. Paris, Milan, and Madrid offer similar retail experiences – plus a 20% refund.

Unsurprisingly, that’s where the luxury spending is now going – even attracting UK consumers to take the train to Paris!

Ignoring dynamic gains

Independent analyses, including by Oxford Economics and the Centre for Economics and Business Research (CEBR), have highlighted the broader economic stimulus that VAT-free shopping generates.

Tourists who come for retail also spend on hotels, restaurants, entertainment, and transport. These ancillary benefits, multiplied across sectors, boost GDP and employment far beyond the narrow confines of retail.

Oxford Economics estimates that reinstating tax-free shopping would lead to a net gain of £350 million per year in GDP, support over 70,000 jobs, and result in a near-neutral fiscal impact due to the knock-on tax receipts. The Government’s modelling, however, appears to ignore these secondary effects entirely, favouring a simplistic static balance sheet over real-world economic dynamics.

Damaging the UK’s global standing

The removal of the UK VAT rebate has significantly undermined the UK’s attractiveness as a global shopping destination. British luxury brands – from Burberry to Paul Smith and Mulberry – have sounded the alarm. Harrods and Selfridges have seen sharp declines in high-spend tourist traffic and cities such as Edinburgh, Glasgow, York, Bath, Bristol, Cardiff and Belfast are also feeling the pain. The UK economy thrives on services and tourism; alienating global spenders by making the UK 20% more expensive than the competition is economic vandalism dressed up as fiscal prudence, with consequences which will be felt over the longer term.

In fact, recent retail footfall data shows international tourist spending in London still lags behind pre-pandemic levels – unlike in Paris, which has surged ahead. The message is clear: without the VAT rebate, the UK is losing billions more in economic activity to its European rivals which, in turn leads to a loss of income and quality jobs for workers.

Not just London

This is often seen as a London-centric issue for wealthy tourists. But at UKFT we know this has had significant repercussions for manufacturers and brands across regional areas, disrupting supply chains and diminishing sales opportunities. Outside London, many manufacturers of fashion, textiles and luxury goods rely on international tourist spending to support local economies. The loss of tax-free shopping has made the UK a less attractive destination for high-spending visitors, leading to a ripple effect through the wider supply chain. Regional suppliers, small brands and freelancers that feed into these industries are experiencing reduced demand, threatening jobs and stalling growth in areas that have long depended on manufacturing and export-driven retail. The impact clearly underscores the importance of international consumer access for sustaining our regional industry and preserving local manufacturing, jobs and skills.

Ideology over evidence

Ultimately, the Government’s decision reflects a wider ideological aversion to tax incentives that appear to “favour” wealthy foreigners. But this is a misreading of the policy. VAT-free shopping is not a luxury subsidy – it is an internationally competitive incentive that aligns with global norms. The US never charges sales tax to foreign shoppers. The EU offers straightforward VAT refunds. Only the UK now demands that international visitors pay local consumption taxes, while receiving none of the local benefits in return.

The Treasury’s refusal to revise its modelling in light of economic reality suggests either stubbornness or political inertia. Neither justifies a policy that actively damages one of Britain’s strongest sectors.

It’s time to change

The decision not to reinstate the VAT rebate is based on flawed modelling, poor economic foresight, and a refusal to acknowledge how global consumers actually behave. Far from being a fiscal loss, reinstating tax-free shopping would stimulate economic growth, protect and create thousands of quality jobs in retail, hospitality and UK manufacturing  and restore the UK’s status as a premier destination for international tourism and retail.

The Government must abandon its static flawed modelling and embrace a dynamic understanding of how tax incentives shape real-world outcomes. Until it does, the UK will keep losing business – and money – to its smarter, more competitive neighbours.