hfly

Yeah, the real problem here is that we do NOT live in a Zero Sum world do we, also that quote seems really specific, despite my hundreds of trips to the UK over the years, I had to look up what Bicester village was. Seems like the vast majority of its customers are Chinese, maybe that is why I am unfamiliar with it? Whether low paid or not, I would assume that the 5000 people or so that work there pay income taxes, the shops pay rates, etc, right? I am sure that Bicester Village has been doing terribly the last few years. The big fallacy is that any of this is somehow a subsidy by UK taxpayers? How so? These are goods that would NOT otherwise be bought, and will be bought elsewhere. It is not like there is a limit to how much tat a Burberry Outlet store can sell, right? OTOH, there are high end stores in town that probably have lost sales equal to the entire sales of Bicester village. I do not think that some people understand that a Patek Philippe Salon, for example may only sell a dozen watches a month, the vast majority are reserved beforehand, and they cost between $10,000 to $2 million, with an average around $45k. Hardly anyone is buying or taking delivery in the UK anymore, plain and simple. Why would they? The third party authorized retailers are in an even bigger bind, as often they cannot as easily shift their sales to other countries. This is an extreme example, but what articles like the FT one ignore is that this is totally discretionary spending, and that no one visiting the UK has to shop there.

KARFA

The true test of your familiarity with the UK would be whether you can say Bicester correctly

NickB

That taxing results in fewer sales is fully understood. Where the debate lies is on: 1) the extent of that effect (how many sales are lost
and 2) its wider economic impact. Let us say, for the sake of argument, that, without tax-free export, you would sell 100K and that, with tax-free export, your sales increase to 120K (i.e. you have 20K of additional sales as a result of the removal of tax). By removing the tax, you will have foregone the tax that you would have received on the 100K. You will, however, have increased the turnover and probably profit of the retailer, who will therefore pay more in terms of income tax, However, the increase in income tax will not fully compensate for the loss of VAT and you will therefore have less tax revenue that you would otherwise have had by imposing VAT (that's the Laffer curve issue). You will therefore need to make up that revenue by increasing taxes elsewhere (hence why the taxpayer ends up subsidising the purchases of the traveler). Does the economic benefit of increasing luxury goods retail sales outweigh this? Well, let us not forget that the tax subsidy of luxury goods retail sales implies increased fiscal pressure elsewhere in the system so the issue becomes whether it is fiscally preferable to subsidise luxury goods retail sales versus, for instance, subsidising investment, business start-ups, etc... And this is very far from obvious, especially as a significant proportion of luxury goods which are sold will be imported goods. So your tax subsidy will, in effect, be partly exported to producers elsewhere. Also, the retail sector is not exactly a major source of high value added skilled jobs so perhaps not the best area to subsidise in you are seeking to develop skilled jobs and high labour productivity. Add to this the social dimension of the issue (i.e. increasing fiscal pressure on the general population so as to make luxury goods cheaper to buy by rich foreign buyers) and you can see why it is less than a compelling proposition.

Heyden

The money I did not spend in the UK did not help pay a rent, a salary, income taxes and business expenses. The German merchant was quite appreciative however and the money I spent visiting his country instead of the UK also included hotels, restaurants, ground transport, attractions, etc. Tourism is a competitive industry and if the UK wants to be less attractive to foreign tourists than their continental competitors it shouldn't be too surprised if those tourists oblige.

Arctic Troll

The big international luxury retailers are, by and large, ultimately not domiciled in the UK for tax purposes. So it makes no difference to the UK exchequer if these items are bought in London, Rome, Munich, Paris, wherever. The profits don't stay in the UK and are not taxed in the UK.

Even in luxury retail stores, the staff are not well paid, and so the income tax/employee National Insurance/employer National Insurance will be minimal.

Now if the changes mean that these luxury retailers close their stores in the UK, then there will be a reduction in the business rates being paid. But there isn't any evidence to suggest that luxury retailers are closing their stores in significant numbers.

I would be astounded if 30% of sales in these luxury retailers were to non-EU customers. Assuming the 30% reduction in sales is accurate (and I remain sceptical), it is more likely a) that UK residents are buying their big ticket items in the EU and 'forgetting' to declare them on their return and b) a natural response to the increased cost of living and related reduction in disposable income.

As for the argument that tourists won't come to London if they can't buy an expensive watch tax-free, well, the evidence from Visit Britain shows this simply isn't the case. Occupancy levels are back to 2019 levels, room rates are higher than ever (and yes, I'm well aware this is due to increased costs, but my point is that hoteliers aren't inflating their occupancy rates through deep discounting).

The sums are simple for this one: if, under the old system, you had 100 non-EU people paying £0 in VAT but, under the new system, you have 98 non-EU people buying in Paris instead, then you still have a gain of 2 people now paying VAT in the UK. The question is whether this 'gain' in VAT revenue is more or less than the 'loss' from business rates, wages, etc if the retailers reduce headcount or even close some of their shops in the UK.

My view? Rich foreign shoppers aren't as important to the UK economy as they think they are.

Getting somewhat back on topic, the same will apply to APD. A certain number of people will no longer be able to afford to book premium economy or business class instead of economy. A certain number of people will now not stop over in the UK in order to avoid APD. A certain number of people will also book their flights ex-EU in order to pay a reduced rate of APD (i.e. they will pay short-haul Y APD instead of long-haul J APD). But if the 'gain' from the increased APD is rate is more than the 'loss' from people taking steps to avoid/reduce it, then it makes perfect financial sense to up the rate.

hfly

Arctic Troll. Again this is NOT a zero sum game. Any sales made to visitors is a plus to the economy. As for what you say about what luxury store employees make, while I have no idea what Bicester outlet employees make I can assure you that many a Bond street worker can pull in very good money especially for those brands which pay commissions or profit share. What you fail to understand is that a Jacob & Co outlet might have only sold 20 pieces a year before this (Those 20 pieces might have been worth $10 million plus), a loss of 5 sales is a 25% loss in business.

I would not rely too much on hotel occupancy numbers as those also cover domestic sales conferences and whatever else and are not an accurate measure of foreign visitors, nor even where they are coming from. British hotels generally do NOT collect such information, I have been asked for a passport maybe once in my life when checking into UK hotels, and if one is asked for ID, one can present a Mickey Mouse club card.

You have missed the most important part as you seem to think that this is about people coming to London, which is a false premise, it is about people coming to London and spending SIGNIFICANTLY less money than they would otherwise. When I refer to myself not buying anything of value in London for export the last 2 years or so, and not spending an estimated $5k, I know a hell of a lot of people that also travel to the UK regularly that buy nothing in the UK anymore. You miss this point. And it is NOT just luxury goods, it can be regular consumer electronics.

Similarly expanding the connection period from 24 to 48 or 72 hours for APD would kick in, could only be a plus to the economy. You think that someone staying in the UK 2-3 days, staying in hotels, moving around, eating, and yes possibly shopping, is worth less to the economy than an APD fee?

Arctic Troll

If a sale made to a visitor attracts a 0% VAT rate and the resulting profit from the sale is sent to another jurisdiction, then that sale makes absolutely zero difference to the revenue of the government.

Indeed, however the tax revenue from the sale of that hotel room is the same regardless of where a visitor comes from. And so if the hotel rooms are being sold, and being sold for a good price, then that's all that matters.

If you spend $5K in the UK and pay a tax rate of 0% on it then the tax revenue from your spending is $0.

If you spend $0 in the UK and pay a tax rate of 0% on it then the tax revenue from your spending is $0.

Now if luxury retailers start cutting headcount and start shutting shops, there will be an impact on other tax revenue- less business rates, less employee income taxes, less employer national insurance. But there's no evidence that this is happening.

As for taxes on profit, you chose an example of Jacob & Co. They are an American company and their profits go back to the US. So if the UK are receiving $0 in corporation tax then a 25% reduction on $0 makes no difference.

If someone changes their holiday habits because of a £20 increase in APD then, to be quite frank, the chances are they aren't a high value spender anyway.

hfly

Jacob & Company is/was just an extreme example. However while a US company, in order to operate that expensive boutique, supply distributors, etc etc they must have a UK entity, and that UK entity, especially after the last decade or so of changes to what can and cannot be "transferred" to other countries and jurisdictions in terms of "profit" would most certainly be paying some corporate tax. They however are small fry. LVMH has more than 6,000 non-alcohol related employees in the UK, and operates over 150 retail outlets. I do not have the time to go into all their UK subsidiaries, etc, but it would seem that in recent years LVMH has paid at least 200 million GBP in UK corporate taxes per year before this idiocy. So if we posit that the average LVMH employee makes GBP50k a year (from the cleaner to various UK CEO's), that is payroll of appx GBP 300 million, what a reduction of 30% in sales leading to a 30% reduction in employees and profitability, would cost what, let's say GBP 100 Million in payroll taxes, etc, and I am not even getting into local rates that would go away. So it would easily be a loss of 160 million GBP just from this one group? A lot more unemployment, and yes the average Sephora would be relatively unaffected, but all the others would be. There are another half dozen big luxury groups that are in the same situation. So let's multiply this by 7, so a loss of over 1.15 billion GBP based on this. Oh yeah, the government has effectively ended nondom as well, so the idle rich that might have just bought these things irrespective of tax are also leaving.

Troll, it is really good that you are not making these policies. No, no very few people will not take a 2 day break because of a 20 quid increase in the APD, but many have been NOT doing so over the years as every time it has risen, more people have stopped doing so. Perhaps you just do not know enough people who have been regularly connecting through European cities for years............but you can ask BA themselves how damaging this has been to them over the years. LAst time I wanted to make a stopover in AMS with my family I believe the difference in my ticket price was about 30 EUR between four people in Club. Last time I did not do so with BA the cost would have been what GBP 600?! The Uk government is being penny wise and pound foolish.

Jagboi

So the business I might be buying something from generates no profit, has no employees, pays no corporate tax and pays no local property pax? It consumes nothing that it pays tax on, like insurance, building maintenance, couriers, power, heat? The employees pay no tax on their earnings?

Economic activity generates all sorts of tax effects, even if they are not immediately obvious. If I buy something from a commissioned salesperson that act of buying something generates taxable income for the salesperson.The government is still making something off a visitor.

You're also assuming that there is a VAT taxable buyer lined up to replace a VAT exempt visitor, but the retailers are saying that isn't so. Some tax income is better than nothing. Similarly, I would have though that keeping UK residents employed was a good thing, better than being unemployed. Unless you're saying places like Bicester Village generated no benefit to the Exchequer when visitors were VAT exempt? I can personally assure you that wasn't true then, and wouldn't be now.

Heyden

Not only isn't there a VAT taxable buyer lined up to replace a VAT exempt visitor some of those taxable buyers are delaying their luxury good purchases until they are in countries where there is a VAT refund. Money coming into a country from offshore is better than money going out.

NickB

That's the Laffer curve argument. The Laffer curve argument is based on the idea that that excessive taxes are counter-productive and reduce overall tax revenue, so that you are better off reducing the tax level, which will increase output to increase tax revenue. Applied to this context, the logic would be that, by reducing taxation on personal exports, you will increase overall sales and gain extra tax this way. The point about the OBR analysis is that the numbers just do not stack up in this particular context. Let us say, for instance that you increase the volume of sales from a base of 100 with full taxation to 120 with the tax exemption on personal exports. The increase in sales will generate a 20% increase in corporation tax revenue. The problem is that, in order to generate that extra 20% corporation tax, you will have need to forego the VAT that you would have got on the 100. Given that VAT is a consumption tax, therefore based on turnover, whereas corporation tax is an income tax, therefore based on profits, you would need to generate a humungous increase in sales to compensate for the loss of VAT. The point of the OBR analysis is that the numbers just do not stack up: you cannot generate the level of increase in sales that would be required to compensate for the loss of VAT.

That is the other argument in favour of tax subsidies: regardless of the impact on tax revenue, they generate additional beneficial effects, whether on employment, GDP, etc... OK as an argument in principle, but then the question becomes whether the particular tax subsidy is the most effective way to produce the expected economic benefit that is sought. And, from that perspective, it is far from obvious that subsidising retail sales is a particular efficient way to promote economic activity and employment. You will probably get a far higher return in terms of economic gains by, e.g., subsidising investment rather than sales.

Jagboi

I can't find it now, but there was a fairly comprehensive Treasury study about the income tax increase in 2010 from 40p to 50p. After 3 years the Treasury found that their net tax taxing decreased and that the number of people reporting incomes over £1M was cut in half. That's important, as they noted that the top 1% of taxpayers contributed 68% of the total income tax takings. Keeping those people in the UK and paying tax is vitally important to the government as a whole.

Which relates to "tax free for tourists" in that it's important to keep them visiting and spending in the UK. The high spenders are mobile and can choose to spend elsewhere easily, and that's lost revenue for the UK as a whole. That's hotels not stayed in, cars not rented, meals not bought etc if someone goes to Paris instead of London.

We'd have to do a deep dive into various numbers to prove or disprove the quantum, but historically higher tax rates have never actually resulted in a consummate increase in tax taxings. The rich go elsewhere and the middle find ways of tax evasion.

hfly

The problem here is that you are parroting the word used by the government and certain publications...."subsidy". This is NOT a true subsidy, as it effects sales that simply would not be made otherwise. When you add into this the fact that pretty much every NON DOM will leave the UK if not in the next year then in the next 5 years (and trust me, I know enough of them and about 98% are in fact leaving....plenty of EU places have been more than happy to pick up the slack and wait another 6 months or so, and there will be other non dom options. This government is not only going to tank higher level retail, but they are going to tank the London real estate market as well.

NickB

Well, that's the point. We do have an OBR study precisely on the question of the effect of the abolition of tax exemption on retail exports, which I referred to in post #76.

Yep. All of this is taken into account in the OBR study. And they still come to the same conclusion.

NickB

Well, maybe it is not in hfly-ese, but in normal English, exemption for a particular sector/certain operations from a tax which is normally due on those operations (such as exempting certain sales from a generally applicable sales tax) can properly be described as a subsidy. In any event, whichever word you use for it does not matter. Whether you call it a 'subsidy', or a 'tax exemption', or a 'tax break', or a 'thingamagic', or a 'lalalalalee' or a 'whoopsidoo' or whatever else makes no difference. What matters is what the measure actually consists of.
eh? Are you suggesting that, without the tax break, there would be zero sales to visitors? Or are you suggesting that there is a magical way to apply the tax exemption only on those sales to visitors that would not have occurred without the tax exemption?

That's the problem: in order to induce those sales that would not have otherwise occurred, you have to exempt not just those operations from the tax but also those that would have occurred anyway even with the tax, and that is where the tax loss lies.


well now, you know a lot of rich people, hfly. Good for you. Does it give you some kind of glow? Does it make you feel good, feel powerful? Because I can't really see the point of your mentioning this and I have to confess that does not strike me as a particularly insightful and illuminating source of analysis. Call me old-fashioned but, personally, I tend to prefer hard evidence, study and analysis rather than 'one bloke on the internet says he knows a lot of people and this is what they say'. As they say, the plural of 'anecdote' is not 'data.'
And this is especially true when the 'what they say' tends to align with their own interests. Fancy that: rich foreigners say that abolishing tax breaks for rich foreigners is a bad idea. Well, what a surprise! Who would have thunk that?
You know what, somehow I suspect that taking some of the heat out of the London real estate market is something that will be regarded by many in the UK in general, and London in particular, as not such a bad thing all things considered... but that, as the all non-dom discussion, is an issue for another thread...