UK industry battles to avoid “catastrophe”

UK Prime Minister Boris Johnson has accused the EU of putting a “revolver on the table” in increasingly embittered trade talks about the UK’s future relationship with the bloc from 1 January 2021. But after the government’s announcement about the future of duty and tax free sales on Friday, it appears that Johnson has grabbed the gun and turned it on the UK’s own travel and travel retail industry instead.

“A catastrophe for UK airports,” said UK Travel Retail Forum Chair Francois Bourienne. “Our industry is weathering the worst crisis in the history of civil aviation, it can scarcely afford another hammer blow like this,” said Airport Operators Association Chief Executive Karen Dee. “Very disappointing,” in the words of ACI Europe Director General Olivier Jankovec, who represents the interests of UK and well as other European airports.

Friday’s UK Treasury announcement that duty free sales of liquor & tobacco would return for EU-bound travellers from 1 January (when a transition period for exiting the EU ends) drew – not surprisingly – whoops from popular UK media outlets. Celebratory ‘booze cruise’ style headlines captured the story as positively as the government no doubt hoped they would.

But since the weekend, as news seeped out that there was another, more negative element to the new rules – namely the removal of tax free sales across a range of other categories from the same date – the narrative has changed. ‘Tax free airport sales to end’ said The Independent. And even from the usually Conservative Party-supporting Daily Mail, ‘Eau No! Duty free bargains will end on perfumes, clothes and electronics on January 1 with only alcohol and tobacco left discounted…’

With the UK government now facing a big lobbying effort from UK airports, travel retailers and confused and angry staff (all voters) who stand to be affected by the changes, might we see another UK U-turn on a burning Brexit issue?

The return of duty free

The latest chapter in this story began on Friday with the UK Treasury’s announcement that duty free sales of alcohol & tobacco for EU-bound travellers would return from January 2021. An updated, enhanced programme of allowances was also announced.

That move was widely anticipated, with the UK preparing to end the transition phase with the EU that runs from 31 January to 31 December 2020 – during which the EU’s single market and customs rules remain in force. Duty free will be available on liquor & tobacco from that point at airports, ports and importantly too, at train stations and aboard ships, trains and planes.

But in a potentially catastrophic development for categories other than liquor & tobacco, including the critical fragrances & cosmetics sector, the government also announced, “We are also ending tax-free sales in airports of goods such as electronics and clothing for passengers travelling to non-EU countries, following concerns that the tax concession is not always passed on to consumers in the airport. In some instances these tax free goods are brought back into the country by UK residents, putting High Street retailers at a disadvantage.”

As part of the changes, VAT refunds for overseas visitors in UK shops will also be removed, it was announced. Overseas visitors will still be able to buy items VAT-free in store and have them sent direct to their overseas addresses, but what the Treasury termed “the costly system of claiming VAT refunds on items they take home in their luggage” will be ended. That in turn has big implications for UK retailers that rely on overseas spend – led by Chinese visitors, for whom the tax saving is an important element in the attractiveness of shopping for luxury goods while in the UK.

The bombshell change to the tax free rules in particular prompted an immediate and furious response from the UK travel retail business.

Francois Bourienne said: ““The anger within the UK industry is palpable. This short-sighted proposal was announced without any discussion with industry, no impact assessment, and no warning. It places UK airports and retailers at a massive disadvantage and will simply send millions in retail revenue to airports in Europe and further afield.” (continued below)

Francois Bourienne: Dismay at the new tax free rules and lack of consultation

“If all tax free sales are to be ended (other than liquor & tobacco), it will have a substantial and immediate impact on UK airports. Hundreds of millions will be lost in sales, & thousands of jobs are at risk – at a time when the industry is already on its knees. This could be the final nail in the coffin of several UK regional airports.

“The UK government tells us they are working on a strategy to restart UK aviation. This outrageous move completely undermines any support package they claim to be developing.”

“Also by ending the VAT-RES scheme in the UK, the government will simply be sending many thousands of high-spending Chinese and other tourists to France, Italy and elsewhere in Europe.

“Every effort will be made by UKTRF and all the UK airports to reverse this decision in the coming weeks. Aside from government engagement at the highest possible level, a legal challenge is also being investigated.”

European industry body ETRC has also hit out at the UK government move. President Nigel Keal said: “The proposal from the United Kingdom to remove VAT relief from sales to international passengers leaving the UK poses a threat to us all. VAT free sales are a cornerstone of the duty and tax free industry. “If adopted, this proposal would dismantle the framework upon which our industry operates, and eventually threaten the viability of the entire aviation ecosystem.

“While we do welcome the return of duty and tax free on excisable products, the majority of products we sell are not excisable, and through the relief provided on VAT for those sales, we have seen the establishment of a global industry. Removing this essential building block could cause irreparable harm to our industry, especially if replicated in other countries.”

Separately, an informed industry source told The Moodie Davitt Report: “This is an incredible move by the UK government. We have had umpteen meetings with all relevant government departments in recent months and this has never figured as a potential outcome.”

The same source noted, “Can you imagine the impact the loss of VAT-registration will have on [London department stores] Selfridges and Harrods? Chinese tour groups will simply spend their money in Galeries Lafayette [in Paris] rather than Harrods. They won’t even come to the UK anymore. Like us, those retailers were kept completely in the dark and this came as a complete shock. They are furious.”

Many urgent questions arose from the announcement, which The Moodie Davitt Report Founder & Chairman Martin Moodie asked of Bourienne below.

Martin Moodie: Can I absolutely confirm that there will be no tax-free sales of ANY items including the critically important perfumes & cosmetics categories for passengers departing English, Scottish and Welsh airports from next January?

Francois Bourienne: Our understanding is that the VAT exemption is being removed from all categories for departing passengers. This would include perfumes/cosmetics.

Ferries and airlines are excluded from the government text on tax free (not that of duty free). Does that mean they can still sell other categories tax free?

The text refers to airports. It is difficult to see how UK legislation could apply to ferries or airplanes as they operate in international waters/airspace. Clarification is needed here.

The inbound allowance for alcohol has received a huge hike. But who benefits (apart from the UK-bound consumer)? Only the offshore retailer surely? Does this not therefore mount an irresistible argument for arrivals shopping in the UK? Why not let devastated UK airports benefit from an increased inbound allowance? Where are negotiations at in terms of UK arrivals shops?

The UKTRF will continue to make the case for the introduction of arrivals shops in the UK. We understand from UK government that this remains under review.

What about Northern Ireland? The text says, “Duty free, personal allowance and the VAT Retail Export Scheme changes will apply in England, Wales and Scotland.” Does that mean the status quo prevails in Northern Ireland? Please clarify what would be the situation for someone flying from Belfast Airport to 1) A non-EU country; 2) an EU country; 3) England, Wales, Scotland.

Northern Ireland’s relationship with the EU is covered by a separate agreement to the rest of the UK. It is still uncertain as to whether UK or EU VAT & Excise duty legislation would apply.

Out of step

Speaking on behalf of UKTRF members, Bourienne added: “This decision puts the UK out of step with travel retail systems around the world, completely disincentivises tourists to visit the UK and British passengers making purchases as they go on vacation abroad, and puts UK airports and travel retail at a substantial disadvantage against their European counterparts after Brexit.

“It may well be the best gift the UK could have given the EU as well as a massive blow for UK plc. In the more immediate term, this announcement deals a hammer blow to an industry already struggling with the devastating impact of the COVID outbreak.

“We are extremely concerned that ministers have not fully appreciated the impact this decision will have on the wider travel retail and aviation sectors.

“We urge the government to immediately review its decision and act swiftly to ensure jobs, businesses and Britain’s place as a premier travel hub are not lost.”

Prime Minister Johnson claimed in recent days that the EU was prepared to go to “extreme and unreasonable lengths” if it does not get its way in negotiations over a trade deal. The description could equally apply to the actions the government has taken with its new tax free and tax refund rules, and their potential impact on travel, aviation and travel retail.

Background

The UK exited the European Union on 31 January, although there was no immediate return for duty free sales between the UK and EU.

The UK entered a transition period and began negotiations over its future relationship with the EU. During this period, which will run until 31 December, it was agreed that there would be no changes to trading rules, and the UK will stay in the single market and the customs union.

As we reported in January, if the UK leaves without a deal in December, it becomes a third country destination, meaning that EU single market rules no longer apply and duty free sales would return for travellers in both directions.

Industry lobbyists had hoped that an agreement that incorporates future duty free arrangements could (and might still) be agreed as part of a wider reciprocal trade deal. But after a fraught week in UK-EU relations (with the UK government announcing plans to break international law by overriding parts of the Withdrawal Agreement), that outcome looks a long way off.