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Disappointment for retail as mini-budget measures including the return of tax-free shopping reversed

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Less than a month after retailers welcomed news of the return of tax-free shopping and income tax cuts as ways to boost demand, there is now disappointment that many of those steps have now been reversed. 

The September 22 mini-budget from Prime Minister Liz Truss and Chancellor Kwasi Kwarteng announced the removal of the 45% tax band and the reduction in basic rate income tax to 19p from 20p, as well as the reintroduction of tax-free shopping for tourists. Measures to cap the average energy bill at £2,500 for two years, a reversal of the previously-planned introduction of a National Insurance levy were also welcomed as a way of stimulating demand – as were plans to bring forward the reduction of Corporation Tax to 19p. But of all those measures, only the reversal of the National Insurance levy has survived yesterday’s statement from new Chancellor Jeremy Hunt, designed to calm financial markets. 

Retail concerns

ParcelHero head of consumer research David Jinks says that while restoring market stability was vital at a time of rising interest rates and government borrowing. But, he adds: “Chancellor Hunt’s emergency statement has a dark side for businesses; it’s very much a two-edged sword. Businesses are already reeling from the corporation tax chaos. The on-off-on rise of this tax on businesses, from 19% to 25%, has caused significant confusion.”

He adds: “In terms of energy price caps, it looks as if there will be a lot less support for businesses than hoped for beyond April. Chancellor Hunt said that any continued support for businesses will only be targeted on those most affected, and that any further measures will be focussed on increasing energy efficiency. That’s bad news for traditional, high-energy use manufacturers and their transport partners.

“Retailers and manufacturers will also be very concerned about the strong possibility that consumers will draw in their horns even further following Chancellor Hunt’s scrapping of energy price guarantees for homeowners beyond April. Any further energy capping will be subject to a Treasury-led review. That’s not going to do much to restore consumer confidence in the medium term. The scrapping of the planned cut in the basic rate of income tax from 20% to 19% will also discourage shoppers from putting their hands in their pockets.”

Tax-free shopping

Paul Barnes, chief executive of the Association of International Retail, says the decision not to reintroduce tax-free shopping is a blow. “The decision to reverse plans to reintroduce VAT free shopping for international visitors will come as a hammer blow to UK tourism and the British high street. 

“This short-sighted move is based on inaccurate and incomplete projections, and risks putting a brake on the return of international visitors who are vital drivers of economic growth throughout the UK. 

“We urge the Chancellor to pause, reflect and commit to a full cost-benefit assessment before deciding on the future of tax-free shopping, which we know is a key motivator for international tourists when choosing where to visit. Ministers must base their decision on the full picture, including the significant economic benefit that international visitors bring to the UK, which this decision puts at risk.”

But Alison Horner, indirect tax partner at accounting network MHA, says while the scheme was a good idea its demise is only a small blow to retail. “It is disappointing to see the retail export scheme added to the bonfire of mini-budget measures,” says Horner. “It was a small change but would have been great for retailers. The UK operated a similar scheme while it was an EU member (the Retail Export Scheme for non-EU visitors) so the plan didn’t break new ground

“However, if it had gone ahead the impact of VAT free shopping would have been a welcome boost to retailers but not enormous in the grand scheme of things. Given the crisis it is understandable the new Chancellor decided to stick to carrying through the National Insurance reversal and throwing away everything else.”

Alex Baulf, senior director of global indirect tax at tax specialist Avalara, says the announcement is disappointing news for retailers’ ability to compete with the world’s shopping capitals when they had hoped VAT-free shopping would encourage foreign visitors and increase sales. “At a time when consumers and businesses are feeling the bite from a cost-of-living crisis and recession fears, retailers will now need to arrange for the items to be physically shipped outside of the UK and retain the VAT purchase evidence in order to sell to overseas customers free of VAT, further adding to their administrative burden.”

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