UK duty & tax free

UK airports count the cost of losing tax free sales

A new report weighs up the potential losses for retailers, airports and the UK economy if the government presses ahead with its proposal to withdraw tax free sales for non-EU travellers from 1 January. By Dermot Davitt.

Ending tax free sales for non-EU travellers at UK airports from 1 January will cost the UK economy £2.1 billion in GDP and will put 19,400 jobs at risk nationally. It will also mean a £1 billion hit to airports’ operating profit in London alone.

That’s according to a York Aviation economic impact assessment of the government decision announced abruptly on 11 September. York Aviation said in its report that the “proposed action to remove the Extra Statutory Concession (ESC) on VAT on goods supplied at duty free and tax free shops strikes at the centre of the [airport] business model, targeting the highest yielding element of the travel retail market, at a time when retailers and airports need support to recover and build back.”

The industry reaction to the decision – and this latest economic assessment – was prompted by the UK Treasury’s announcement that duty free sales of alcohol & tobacco for EU-bound travellers would return from January 2021.

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 – 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 crucially too, at train stations and aboard ships, trains and planes.

Pushing Boris to backtrack: A letter from UK airports, retailers and brand owners urging the UK government to reverse its decision

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.”

Potential economic costs of the removal of tax free sales

Source: York Aviation

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.”

Estimated breakdown of UK airport revenues in 2019

*Estimated breakdown Source: Jacobs / Leigh Fisher UK Airports Performance Indicators

Role of retail

Importantly, UK airports derive an average 21% of their retail revenues, though for some it is far higher.

Heathrow generates the largest retail revenues at around £585 million (20% of revenues). Gatwick and Manchester follow, generating around £191 million (24% of revenues) and £97 million (21% of revenues) respectively, said York Aviation.

Other airports are, proportionately more reliant on retail revenues. Edinburgh generates around 38% of its revenues from retail, with Leeds Bradford at 31%. Others with a higher than average reliance on retail revenues include Bristol, Newcastle, Liverpool and Cardiff.

Profits impact

The study also reported on the devastating impact of losing tax free sales on operating income, with figures described as “conservative” by York Aviation.

“Unsurprisingly, given that it is by far the UK’s largest gateway to non-EU markets, Heathrow is estimated to be the worst affected airport, with an impact on operating profits of over £200 million (a percentage reduction in operating margin of around 20%). 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. It should also be remembered that there is potential to damage the structure of competition in the UK market, particularly in relation to long haul services. If the UK’s regional airports lose the additional retail revenues that come from the non-EU market currently, it will make it harder for them to compete and make the business case for investment in new long haul services in the future, pushing the UK towards a situation in which Heathrow becomes even more dominant in long-haul markets than it is now.”

The cumulative effect of losing tax free sales and Brexit will lead the industry even further into loss.

Cumulative impact of COVID- 19 and lost retail revenue

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.

The report said: “It also needs to be considered against the potential gains that might have been made following the return of duty and tax free shopping. The net loss from this reversal in positions would be in excess of £3.2 billion in GDP and nearly 30,000 jobs. It should be noted that some of this effect may be offset following Brexit through increased sales of excisable goods but, ultimately, this is the smaller part of the travel retail market at UK airports and it is highly unlikely that this could ever make up the shortfall.”

UKTRF Chair Francois Bourienne repeated his call to government on behalf of members to reverse the decision.

“Retailer and airport revenue will suffer, but most regrettably thousands more jobs and livelihoods will be wiped out in regions across the UK supported by the sector.”

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The Moodie Davitt eZine

Issue 284 | 30 September 2020

The Moodie Davitt eZine is published 12 times per year by The Moodie Davitt Report (Moodie International Ltd). © All material is copyright and cannot be reproduced without the permission of the Publisher. To find out more visit and to subscribe, please e-mail

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