London’s Luxury Retail Struggles: VAT Policy Hurts Tourism and Shopping

London’s luxury retailers are grappling with a significant challenge as the city falls behind rivals Paris and Milan in attracting wealthy tourists.

This decline can be traced back to the UK government’s decision to scrap tax-free shopping for overseas visitors at the end of 2020.

As a result, a spending boom has emerged in other European cities, with tourists from the United States, China, and the Gulf region showing a strong preference for locations where tax breaks still apply.

In January alone, VAT receipts from Middle Eastern visitors to continental Europe increased by an impressive 224% compared to the same month in 2019.

American spending experienced an even more dramatic rise, soaring 297% over the same period.

Retailers Rally for Change: Calls to Reinstate VAT-Free Shopping

Major London retailers are banding together, lobbying the UK government to reintroduce VAT-free shopping for visitors in an effort to boost the city’s appeal as a shopping destination.

The recent reopening of China’s borders has added a sense of urgency to the issue, as Chinese tourists, who have historically been the luxury industry’s biggest spenders, are expected to start traveling again soon.

Burberry, the UK’s largest luxury retail brand, has already sounded the alarm, warning that London is losing out to other European cities due to the VAT rule.

Domino Effect: Local Economy and Property Market Feel the Pressure

The continuation of the current tax policy could have far-reaching consequences on London’s tourism ecosystem, including hotels, restaurants, taxis, museums, and theaters.

New Bond Street, once among the top-three most expensive retail streets globally, slipped out of the ranking in 2022.

In its place, Via Montenapoleone in Milan rose to prominence, with rents now 9% above 2019 levels.

Retailers argue that restoring the tax incentive is crucial for maintaining the city’s competitiveness and supporting the local economy.

Warning Signs: Shifting Spending Patterns and Future Concerns

The impact of the VAT policy is evident in the spending patterns of wealthy tourists.

Burberry’s finance chief reported a 122% increase in sales to Middle Eastern travelers in its European stores compared to the same period in 2019.

In contrast, sales in the UK increased only by a modest 14%.

This disparity underscores the critical role that tax-free shopping plays in attracting international shoppers.

A Global Blue survey of 10,000 Chinese tourists who visited Europe in 2019 revealed that only 42% planned to visit Britain in the future, down from 70% in 2019.

This decline in interest is particularly concerning for London’s luxury retail industry, as Chinese tourists are known for their significant spending power.

Retailers fear that the longer the tax-free shopping policy remains absent, the more London will lose its appeal as a shopping destination.

As wealthy tourists continue to flock to Paris, Milan, and other European cities to take advantage of tax breaks, London’s luxury retailers are left grappling with the consequences of a policy that puts them at a competitive disadvantage.

The time to act is now, they argue, before London’s status as a premier shopping destination is permanently diminished.

Article In a Snapshot

• London’s luxury retail sector struggles as the city falls behind Paris and Milan in attracting wealthy tourists due to the UK government scrapping tax-free shopping for overseas visitors in 2020.
• Major London retailers lobby the UK government to reintroduce VAT-free shopping to boost the city’s appeal as a shopping destination, with increased urgency due to the reopening of China’s borders.
• The current tax policy has far-reaching consequences on London’s tourism ecosystem and property market, with New Bond Street losing its status as one of the top-three most expensive retail streets globally.
• The VAT policy has shifted spending patterns, with sales to Middle Eastern travelers in European stores increasing by 122%, while UK sales only increased by 14%.
• A survey of Chinese tourists reveals a decline in interest in visiting Britain, which is concerning for London’s luxury retail industry given their significant spending power.