The UK's 'Tourist Tax' is sending shoppers to Paris, Milan, and Madrid for tax-free purchases.

Since the UK scrapped tax-free shopping incentives post-Brexit, thousands of tourists have redirected their shopping sprees to cities like Paris, Milan, and Madrid instead of visiting Britain.

Recent analysis indicates that in 2019, 162,000 tourists from outside the European Union sought VAT refunds exclusively in Britain. Of these, one fifth are now seeking rebates in other parts of the EU, where the tax break remains in place.

Despite strong lobbying efforts from retailers and tourism-related companies, the UK terminated the tax incentive in 2021. Since then, 34,000 tourists have redirected their tax-free shopping from Britain, increasing their average spending per person from €2,900 ($3,622) in 2019 to €3,800 in 2023, as reported by Global Blue, a Switzerland-based tax rebate provider that monitors passport numbers.

France and Italy are reaping the greatest benefits, drawing in over two-thirds of these travelers, while Spain's retail sector is also experiencing a surge.

"The absence of a tax-free scheme is undeniably affecting international sales at Selfridges," stated Andrew Keith, chief executive officer of the upscale UK department store chain.

According to the New West End Company, a lobby group representing London's tourist hub, Britain's refusal to reinstate the tax break post-EU exit is more detrimental than the recent cost-of-living crisis.

However, the UK government holds the belief that its policy has fortified the public purse and hasn't dissuaded tourists. It commissioned independent reviews by the Office for Budget Responsibility (OBR), a government spending watchdog, both in 2020 and this year. The OBR estimated a £462 million ($579 million) benefit to the public finances in the last fiscal year from closing the loophole, even after considering the impact on tourism and displaced spending — with projections exceeding half a billion pounds in the current fiscal year.

Despite the absence of the tax incentive, tourism to Britain remains robust. Hotel occupancy in London surpassed pre-pandemic levels in December, as reported by consultancy firm RSM UK, while Heathrow saw an all-time high of 18.5 million passengers in the first quarter of this year. Oxford Street, the city's renowned shopping district, is experiencing a resurgence.