UK airports count the cost of losing tax free sales

But, as reported, 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.”

The bombshell change to the tax free rules for non-EU travellers in particular prompted an immediate and furious response from the UK travel retail business. On 17 September, 35 airport, retail and brand representatives sent a letter to UK Prime Minister Boris Johnson calling for a reversal of the decision, saying that it would disadvantage the UK industry.

The UK Travel Retail Forum said last week: “In addition to unfairly increasing the cost of airside shopping for items such as perfumes, cosmetics and confectionery for British passengers travelling abroad, the policy is also out of touch with international standards. Industry has warned that it will undermine UK aviation competitiveness, with EU member airports gaining an overnight advantage over their UK counterparts, and could force smaller UK airports who rely on passenger retail out of operation altogether.”

The York Aviation report highlighted what it termed “serious flaws” in the HMRC assumptions made in reaching this decision, intended as a cost-saving measure. Rather than bolstering Treasury coffers through the recovery of VAT in theoretical future sales, the move is likely to significantly reduce inbound tourism, traffic and sales, it said – a decision that “plays directly into the hands of EU airport and retail operators, who will be Europe’s cheapest shopping destinations for international tourists”.

The York Aviation report said that Heathrow – with its high proportion of non-EU travellers – would be most affected in terms of income this year, with an impact on operating profits of over £200 million (a percentage reduction in operating margin of around 20%). The report said: “Others are, however, also significantly affected, with, for instance, Gatwick losing around £38 million and Manchester around £19 million. Losses at other airports are smaller in volume terms but are still significant in terms of their effects on operating margins.”

The move will differ in terms of impact airport by airport, partly depending on exposure to non-EU travellers. Heathrow has over 50 million passengers from non-EU markets each year or around 62% of its total. For Gatwick and Manchester the figure is over 30%. Several of the UK’s major regional airports have 20% of more of their passengers travelling to or from destinations outside the EU, including Birmingham, Glasgow, Newcastle and Aberdeen.

And even some relatively small airports with hub services have a significant exposure to non-EU markets as a proportion of their passengers, for instance Humberside and Durham Tees Valley, said the report.

York Aviation noted: “It should also be remembered that, post-Brexit, competitor airports in the EU will be able to generate enhanced revenues from UK-bound passengers as these sales will become duty and tax free and that the expectation within the UK industry was that the reverse would also apply. The proposed position will not only not deliver equality but will worsen the competitive imbalance between UK and EU airports.”

The study said: “Major airports will also suffer huge erosion of margins and the potential losses in terms of revenues are significant. Heathrow is estimated to lose around £744 million in operating profits in 2021, with Gatwick and Manchester seeing reductions in operating profits of £197 million and £112 million. The UK’s major regional airports often lose in excess of £10 million in operating profits and up to as much as £48 million.

“In many cases operating margins are reduced to zero or worse or current operating losses are significantly increased. UK airports have already stopped their capital expenditure and investment programmes in the face of the pandemic, with knock-on consequences for the construction sector. Loss of retail revenues relating to the loss of the ESC will undermine the business case for a return to investment and hamper the ability of airports to support economic recovery.”

Impact on the economy

Far from representing a positive for the UK exchequer, the new government proposals will lead to the reverse, with the estimated job losses and GDP impact noted above.