Hopes that the “tourist tax” will be scrapped in the Budget were fading on Friday.
London business chiefs issued last minute appeals to Jeremy Hunt to bring back VAT-free shopping for tourists to inject fresh momentum into the capital’s economy as he seeks growth for the UK.
But the Chancellor is expected to only have limited “fiscal headroom” for tax cuts when he unveils the Budget on Wednesday.
Mr Hunt has been willing to listen to submissions from tourism, hospitality and other bosses about their economic arguments for ditching the “tourist tax”.
But given his restricted leeway for tax cuts he could prioritise reducing other levies, possibly National Insurance contributions.
The Chancellor asked the Office for Budget Responsibility to review bringing back VAT-free shopping for tourists given the growing calls, including from some senior Tory MPs, to do so.
The OBR was asked to deliver its report for the Budget but any final decision on the levy could take place at a future fiscal event.
Hospitality bosses say the “tourist tax” means many wealthy travellers choose to head to other European cities such as Paris and Milan rather than London.
Karim Fatehi, head of the London Chamber of Commerce and Industry, said: “The return of VAT-free shopping would provide an unalloyed boost to London’s prosperity.”
Ros Morgan, chief executive of the Heart of London Business Alliance, added: “Tax free shopping is a quick win to boost London’s international competitiveness and the research shows that it will more than pay for itself.”
However, ministers have long argued that scrapping the “tourist tax” would cost too much in lost tax take.
Some estimates have suggested the Treasury would lose out to the tune of around £2 billion.
Campaigners against the “tourist tax” say these analyses do not take into account the wider benefits to the economy from tourist visits such as to hotels and restaurants.
Rishi Sunak ditched VAT-free shopping when he was Chancellor in January 2021.
The move meant it was 20 per cent more expensive for foreign tourists to shop in London because they could not reclaim the VAT on the purchases they take home as they leave the UK.
Mr Hunt’s “fiscal headroom” is so limited that he has considered scaling back non-dom tax status, a move advocated by Labour, to raise funds to pay for other tax cuts.
Other options being mooted include a cut to Income Tax, which the Prime Minister has previously championed, and extending the windfall tax on oil and gas giants to raise more revenue.
