Scotland’s tourism and retail industry is losing £457 million annually in potential spending from international visitors due to the UK government’s decision to scrap tax-free shopping for tourists, according to new research presented to business leaders in Edinburgh this week.
The findings, released by the Association of International Retail (AIR), reveal that restoring VAT rebates for overseas visitors would generate an 11% projected rise in spending, creating 9,140 jobs across Scotland’s tourism economy, including retailers, hotels, restaurants, tourist attractions, museums, galleries, taxis and transport services.
Over 500 business leaders, representing leading Scottish brands including Hamilton & Inches, the Scottish Whisky Association and Laings, are now calling for Chancellor Rachel Reeves to conduct a full-scale review of the previous government’s 2021 decision to end the VAT retail export scheme.
Scotland Outperforms UK Tourism Recovery Despite Tax Handicap
While Scotland has bucked the broader UK trend with visitor numbers up 26% last year compared to 2019 levels and visitor spending reaching £4 billion, the AIR analysis shows the country could have achieved significantly more. If Scotland had maintained pace with EU competitors that retained tax-free shopping, there would have been an additional £365 million spent by international visitors.
The research highlights a stark performance gap between the UK and its European rivals. Spending by non-EU visitors has stagnated at just 75% of pre-Covid levels in the UK, while soaring to 166% of 2019 levels in Spain, 159% in France and 137% in Italy. This disparity has cost the UK an estimated £2 billion in lost non-EU visitor spending in 2024 alone, which could have supported around 40,000 retail jobs.
Dr Liz Cameron CBE, Chief Executive of the Scottish Chambers of Commerce, has consistently advocated for the policy’s reversal. “The Chancellor has a clear opportunity to show the United Kingdom is open for business,” she said. “It is now indisputable that the removal of tax-free shopping has damaged UK’s retail offering and has disincentivised international tourists from spending whilst in the UK”.
Scottish Businesses Bear the Brunt
The impact extends far beyond Edinburgh’s Royal Mile to businesses across Scotland. Johnstons of Elgin, the renowned Scottish cashmere retailer, previously warned it could close its iconic shops in Edinburgh, St Andrews and London if tax-free shopping ended. Chief Executive Simon Cotton explained that VAT reclaim represented “around half of our business” in those three key stores.
Sir Rocco Forte, chairman of Rocco Forte Hotels which owns Edinburgh’s Balmoral hotel, has been a vocal critic of what he terms “the tourist tax.” Writing in The Scotsman, he noted: “My hotel group has properties across Europe and unfortunately tourists are simply not returning in the same numbers to Scotland as they are elsewhere in Europe”.
He added: “Many of our international guests are now cutting the amount of time they spend in Scotland and adding on a quick trip to Paris, Berlin, Milan or Dublin to do the shopping that they would traditionally do here”.
The Economic Case for Restoration
Independent economic analysis commissioned by business leaders provides compelling evidence for policy reversal. The Centre for Economics and Business Research (CEBR) concluded that restoring tax-free shopping would cost the UK £10.7 billion in lost GDP and deter two million foreign visitors annually. For every £1 refunded in sales tax to foreign tourists, the exchequer would gain £1.56 in other taxes through the dynamic economic effects of tourist expenditure.
Oxford Economics research for AIR found that reintroducing tax-free shopping would attract more than 1.6 million extra visitors to the UK in 2025/26 and stimulate an extra £2.8 billion of tourist spending. The economic footprint would support over 78,000 jobs and £4.1 billion in GDP contribution.
Government Resistance Continues
Despite mounting pressure from business groups, the Labour government has not committed to restoring the scheme. When the Conservative government briefly considered reintroducing tax-free shopping in September 2022, the proposal was withdrawn after Prime Minister Liz Truss’s resignation.
The Treasury’s original assessment estimated the scheme cost the Exchequer £500 million in VAT refunds in 2019, with potential savings of up to £1.8 billion when administration costs were included. However, these figures have been disputed by industry leaders who argue they fail to account for the broader economic multiplier effects of tourist spending.
The Office for Budget Responsibility’s impact assessment acknowledged the scheme could deter 30,000 tourists annually from travelling to the UK, though industry research suggests the actual impact is far greater, with the Centre for Economics and Business Research estimating 500,000 fewer visitors in just three months.
As Chancellor Rachel Reeves prepares future fiscal announcements with economic growth as her stated priority, the mounting evidence from Scotland and across the UK retail sector suggests that tax-free shopping restoration could provide a significant boost to the tourism economy without the Treasury costs originally feared.
