The Truth About VAT Refunds, Part 1
What if you could walk into a shop, and because of your foreign good looks, the sales assistant decides to give you a 20% discount on your purchase?
That actually happens today. Sort of, at least. Non-EU shoppers in the UK can benefit from the Retail Export Scheme, which allows value-added tax (VAT) on retail purchases to be deducted. To illustrate how frequently this ‘discount’ takes place; close to 22m overseas visitors in the UK spent over £6bn on shopping last year. What’s more, according to VisitBritain, tourist spending will be hiking up by 8.1% in 2017.
There are some exceptions to the rule, however — no food and beverages, no services (including theatre tickets), no unmounted gemstones and you can certainly forget about sailing off a yacht VAT-free. Certain sanitary products, books and children’s clothes are either reduced-rated (5% VAT) or zero-rated (0% VAT). However, for the vast majority of tourist retail purchases, including clothing, accessories and electronics, the 20% VAT is refundable under the scheme. Take for example a handbag that costs £600; VAT on the item is £100. Add that to Boxing Day / New Year sales and you’ve got yourself a real winner.
Does all this sound too good to be true? Because it is. Much to the detriment of international shoppers, private equity backed companies such as Global Blue have made large, lucrative businesses out of this industry, piggy-backing on the strong growth in retail spend in recent years whilst charging inbound tourists high handling fees.
The business model is simple: customer pays for good and is issued a VAT form alongside their normal purchase receipt. They fill the form out, queue up at the airport for a customs stamp and presto, free money back courtesy of HMRC. Refund companies, as the intermediaries processing forms and administering the payouts to travellers, get a royal cut of up to 50% of the VAT in handling fees. Most infuriating of all, there are hidden fees that travellers only learn about as they are leaving the country — e.g. a £4 fee per form — for which they have no choice but to accept. How is £4 to process a piece of paper, or indeed, a 15% FX fee in today’s world justifiable? Remember how VAT is 20%? You’d be lucky to get 8–10% back. Take for example a £300 purchase, on which VAT is £50. In today’s VAT refund system, you can reliably expect to get about £24 back instead.
So, who is to blame? It is hard to single out one party to point the finger at as such. The dynamics and the flow of benefits in the industry are complex and not immediately obvious. In part 2, I will discuss how the industry came to become the way it is today, and what key players have done, or not done, to remedy the situation.
