A Treasury reversal on scrapping tax-free shopping would lead to the UK handing visitors from the EU a subsidy of almost £1bn-a-year, Whitehall officials have claimed.
Retailers and airports have raged at a decision to end VAT-free shopping when Britain formally leaves the EU at the end of the year.
Business leaders have blasted the Treasury’s decision as a “staggering own goal”, warning that it will lead to 138,000 job losses and cost the economy £3.5bn.
The decision has been probed by parliament’s Treasury Select Committee.
In a letter from the Exchequer to committee chair Mel Stride, Treasury minister Kemi Badenoch said that if the current rules remained in place once the UK leaves the EU, visitors from the Continent will be able to reclaim VAT on goods.
The result would be a “deadweight loss by subsidising spending from EU visitors which already happens without a refund mechanism in place”, Ms Badenoch said.
Currently the VAT retail export scheme costs HM Revenue & Customs around £500m-a-year.
Extending the scheme to EU citizens would mean the annual bill would balloon to £1.4bn, a rise of £900m, she said.
Currently overseas visitors can reclaim VAT on luxury purchases as they depart. Shopping at airports is also VAT-free.
With airports predominantly charging so-called “turnover rents” - taking a proportion of sales rather than a fixed fee from retailers - this could have a detrimental effect on the aviation sector.
Heathrow has launched a Judicial Review to challenge the Government’s decision.
A spokesman for a group of retailers opposing the Treasury proposals said that it had “miscalculated” the costs and insisted that extending the scheme would be considerably cheaper.
French President Emmanuel Macron pounced on the Treasury’s decision by reducing the value of goods at which VAT can be reclaimed in September. The move was seen as an attempt to lure wealthy shoppers to Paris instead of London.
Alongside an end to VAT-free shopping, ministers announced the abolition of duty on cigarettes and alcohol sold at airports. The Government says this will provide a boost to duty-free retailers and compensate for some of the lost business suffered at airports.