It has certainly been a long and winding road since the UK voted to leave the European Union back in June 2016. The decision has had colossal geopolitical and financial ramifications which will continue to affect the UK’s social and political climate. No doubt it also impacts the luxury goods market.
With a last minute Brexit deal in place, we finally have a clearer idea of Brexit’s effect on purchasing luxury handbags in Britain and the subsequent ramifications for the industry globally.
In short, the deal is set to make it more expensive for non-UK and non-EU shoppers to buy luxury bags in Britain. Why are UK and EU shoppers unaffected? Under the deal, luxury goods between the UK and EU are tariff exempt. In other words, there’s no real change.
The change affects other International buyers. They will no longer be able claim back the 20% value added tax (VAT) automatically applied to purchases, unless they ship their purchases home. In practical terms, those of us that, for example, shop in London – whether for our favorite British or French brands- will effectively pay the VAT.
With that in mind, why would you buy in England when you could purchase anywhere in the EU and receive a refund of the VAT? And that is on the mind of many brands and shopping outlets in the UK.
A host of companies, including Heathrow Airport, which have a vested interest in keeping the value-added tax rebate program, objected to the decision. It therefore currently faces a judicial review, the results of which are set to be revealed in February. These companies’ concerns are supported by figures from the Centre for Economics and Business Research which warn that the number of non-EU visitors could be set to drop by up to 7.3%, potentially resulting in a £1.8 billion drop in sales.
Many travelers from abroad purchase luxury items in Europe due to the significant price differences. Part of the price difference is the VAT refund. According to managing director of luxury goods at investment banking company Citi, Thomas Chauvet, tourists are responsible for around half to two-thirds of luxury sales in Europe.
As a result, experts say the UK’s decision to end the VAT rebate program for foreign shoppers is a cause for concern for the country’s luxury goods market. Speaking to Vogue Business, luxury goods analyst at financial services company Jefferies, Kathryn Parker, questioned why international shoppers would opt to purchase luxury in Britain instead of France or Italy where they will get a tax refund.
Due to international shoppers’ immense spending power in the European luxury goods market, we could see a significant drop in the UK’s luxury sales and an increase in other European countries.
A study conducted by Vogue Business revealed that 60% of international travellers from the US are less likely to visit the UK due to the end of the VAT rebate scheme, along with over 60% of international travellers from the Far East. As a result, many are concerned over the potential lack of luxury investment in the UK.
The threat to the UK’s luxury goods market could be particularly damaging for British brands such as Burberry since 10% of its sales come from the UK. The brand’s Chief Financial and Operating Officer, Julie Brown, told Bloomberg that while the company is set to face additional charges it feels optimistic in its ability to deal with the impending disruption. Brown was keen to focus on Burberry’s successes like its new bags, the Pocket, Lola and TB styles which the company hopes will help to weather the impact of Brexit.
The extent to which Brexit will change luxury shopping in Europe and more specifically the UK is still not known. More will be revealed when the results of the judicial review are released next month.
What are your thoughts on the current state of the Brexit deal in regards to the luxury sector? Will you be deterred from buying luxury in Britain if you no longer get 20% VAT back. Let us know.