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BRIEFING PAPER

Number 1223, 18 January 2021

Passenger purchases of alcohol and tobacco

By Antony Seely

Contents: 1. The UK’s rules for personal

imports of alcohol and tobacco

2. Brexit and the UK regime from 1 January 2021

4. Annex 1: The pre-1 January 2021 regime for duty- and tax-free goods

5. Annex 2 : Technical note on the withdrawal of the VAT RES and the airside ESC

2 Passenger purchases of alcohol and tobacco

Contents Summary 3

1. The UK’s rules for personal imports of alcohol and tobacco 4 1.1 The implications of the Single Market 4 1.2 The burden of proof for personal imports (2000-2002) 6 1.3 Transitional arrangements for new Member States (2004-2009) 11

2. Brexit and the UK regime from 1 January 2021 14

3. Annex 1: The pre-1 January 2021 regime for duty- and tax-free goods 26

4. Annex 2 : Technical note on the withdrawal of the VAT RES and the airside ESC 29

Cover page image copyright Pound coins / image cropped. Licensed under CC0 Creative Commons – no

copyright required

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Summary Since 1 January 1993 – the inception of the Single European Market – travellers within the EU have been allowed to import alcohol and tobacco products which they have purchased for their own use, without paying any additional duty on their return. Before that date, shoppers could only import limited quantities of tax-paid goods. Duty-free sales on journeys within the EU were abolished from 1 July 1999, though they remain for journeys to countries outside the EU. When travellers buy goods in the EU, they pay all the duty and VAT in the Member State where they buy them. Each Member State may set indicative levels of alcohol and tobacco purchases, to help customs officers distinguish between genuinely private imports and commercial importation. When it was part of the Single Market, the UK set these minimum indicative levels (MILs):1

Alcohol Tobacco 110 litres beer 800 cigarettes 90 litres wine 400 cigarillos 10 litres spirits 200 cigars 20 litres fortified wine (eg, sherry, port) 1kg smoking tobacco At the time of the 2020 Budget the Government launched a consultation on the “potential approach to duty- and tax-free goods policy after the transition period following the UK’s departure from the EU.”2 Following this, in September 2020 the Government announced a series of reforms to these rules, to apply from 1 January 2021 with the end of the transition period and the UK’s exit from the Single Market.3 Passengers leaving Great Britain (England, Scotland and Wales) are now entitled to buy alcohol and tobacco products duty-free, irrespective of their destination. All passengers entering Great Britain are entitled to bring in defined amounts of alcohol, tobacco and other goods, without having to pay UK VAT or duty on these imports, as follows:

Alcohol • 42 litres of beer • 18 litres of still wine • 4 litres of spirits OR 9 litres of sparkling wine, fortified wine or any alcoholic

beverage less than 22% ABV Tobacco • 200 cigarettes OR • 100 cigarillos OR • 50 cigars OR • 250g tobacco OR • 200 sticks of tobacco for heating • or any proportional combination of the above. Any other goods • £390 or £270 if travelling by private plane or boat.4

1 HMRC, Travelling to the UK: Notice 1, October 2011 2 Budget 2020, HC 121, March 2020 para 2.236, The deadline for responses was 20 May. 3 Written Statement: Excise Duty & VAT - HCWS448, 11 September 2020 4 HMRC, UK customs information: England, Scotland & Wales, 31 December 2020 & Bringing goods into

the UK, retrieved January 2021. Different rules apply for passengers entering Northern Ireland from the EU: UK customs information: Northern Ireland, 31 December 2020.

4 Passenger purchases of alcohol and tobacco

1. The UK’s rules for personal imports of alcohol and tobacco

1.1 The implications of the Single Market With the introduction of the Single Market on 1 January 1993 travellers within the EU have been allowed to import alcohol and tobacco products which they have purchased for their own use, without paying any additional duty on their return. Before that date, shoppers could only import limited quantities of tax-paid goods.

Common arrangements for charging excise duty across the EU with the advent of the Single Market were first set out by Directive 92/12/EEC, agreed in February 1992. Article 8 of the directive stated that, “as regards products acquired by private individuals for their own use and transported by them, the principle governing the internal market lays down that excise duty shall be charged in the Member State in which they are acquired.” This established the rule that provided goods EU travellers have are for their personal use or consumption, they need not pay any further excise duty on such goods when they return home from another Member State.

The directive also allowed for each Member State to set indicative levels of alcohol and tobacco purchases, to help Customs officers distinguish between genuinely private imports and commercial importation.

Article 9 specified the minimum guide levels which any country could use. These provisions are now consolidated in Directive 2008/118/EC. Article 32(1) states that “excise duty on excise goods acquired by a private individual for his own use, and transported from one Member State to another by him, shall be charged only in the Member State in which the excise goods are acquired.” Article 32(3) sets the minimum indicative limits that may be used “solely as a form of evidence.”5 The levels are indicative only. Below them, imported goods are chargeable with duty by the home state only if they are sold or have been purchased for someone else.

At the time the UK Government decided to set its guide levels equal to the minimum indicative limits set out in Article 9 of directive 92/12/EEC.

Alcohol Tobacco

110 litres beer 800 cigarettes

90 litres wine 400 cigarillos

10 litres spirits 200 cigars

20 litres fortified wine (eg, sherry, port) 1kg smoking tobacco

The UK’s indicative levels were changed just once after they were introduced. In October 2002 the limits for cigarettes and smoking tobacco were increased from 800 cigarettes and 1kg of smoking

5 The European Commission has a clear summary of the rules for travellers on its site.

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tobacco to 3,200 cigarettes and 3kg of smoking tobacco.6 The old limits for both categories were reintroduced from 1 October 2011.7

In assessing whether goods are for one’s own use or not, the important distinction is between commercial purchases and non-commercial ones. Should it be found that a traveller has purchased goods for a commercial purpose, and not their own use, HMRC or Border Force officers are empowered to seize the goods in question, and that person’s vehicle.

Travellers can appeal against the legality of any seizure – a decision heard by a magistrates’ court – as well as making a request for HMRC or Border Force to return the goods (known as a ‘restoration’). In the latter case, if the request is refused travellers must first ask for a review by an officer not previously involved in the matter, and then, if they disagree with this decision, may make an appeal to tribunal.8

The Excise Duties (Personal Reliefs) Order SI 1992/3155 (PRO) introduced the UK’s indicative limits, or guide levels, – as well as the criteria for determining whether goods are for someone’s personal use or not. The regulations specified a number of factors to be taken into account by Customs officers (under paragraph 5(2) of the Order):

(a) [the traveller’s] reasons for having possession or control of those goods;

(b) whether or not he is a revenue trader;

(c) his conduct in relation to those goods and, for the purposes of this sub-paragraph, conduct includes his intentions at any time in relation to those goods;

(d) the location of those goods;

(e) the mode of transport used to convey those goods;

(f) any document or other information whatsoever relating to those goods;

(g) the nature of those goods including the nature and condition of any package or container;

(h) the quantity of those goods;

(i) whether he has personally financed the purchase of those goods; and

(j) any other circumstance which appears to be relevant.

The PRO was amended in 1999 to take account of the abolition of duty free sales within the EU, and to make explicit the then-implicit right of courts and tribunals to decide whether goods that were purchased in another Member State had been brought into the UK for commercial purposes and are thus not entitled to relief from UK excise duty.9

6 HL Deb 29 October 2002 cc18-21WA 7 HMRC, Reducing the Minimum Indicative Levels for Tobacco Products: tax information

& impact note, 25 July 2011. This change was made by secondary legislation (SI 2011/2225).

8 HMRC, What you can do if things are seized by Customs, August 2020. Gov.uk, Complain about HMRC & Border Force complaints procedure, ret’d January 2021.

9 SI 1999/1617. The Order was debated by the Select Committee on Delegated Legislation on 29 June 1999.

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In turn these provisions were consolidated in the Excise Goods (Holding, Moving & Duty Point) Regulations SI 2010/593 – specifically reg 13. The wording used in reg 13 was very similar, with regard to these factors, with one minor exception: on the question of the traveller’s conduct – item (c) in the list above – reg 13(4)(c) refers to the traveller’s “conduct, including [their] intended use of those goods or any refusal to disclose the intended use of those goods” (emphasis added).

In a case decided in November 2006 the European Court of Justice confirmed the principle that only products acquired and transported personally by private individuals are exempt from duty in the country into which they are imported.10 In the past the UK Government had strongly supported this approach and the value of the indicative limits as an important tool to prevent duty evasion. At the time Treasury officials were quoted as describing the ECJ’s ruling as “the right and common-sense judgement that upholds the existing laws on cross-border shopping and national rates of taxation.”11

1.2 The burden of proof for personal imports (2000-2002)

As noted above, if a traveller is found to have purchased goods for a commercial purpose, and not their own use, those goods and the traveller’s vehicle may be seized. In March 2000 the Labour Government announced a new strategy to tackle tobacco smuggling, and one of the consequences was a strong rise in the level of seizures of both goods and vehicles.12 The practice of customs officers stopping travellers and seizing their goods where they exceeded the guide levels proved controversial and legally contentious.13

In May 2002 the official approach to seizing vehicles was modified, in light of a judgement by the Court of Appeal concerning the proportionality of a decision to take someone’s vehicle as forfeit.14 In this case the respondent had bought cigarettes and tobacco for members of his family with money provided by them. Although the goods were to be redistributed on a ‘not-for-profit’ basis, both the goods and the respondent’s vehicle were seized on the grounds that the goods were held for a ‘commercial purpose’ and UK duty had not been paid on them.

The Court of Appeal upheld a tribunal decision that this had been disproportionate, ruling that in this case the customs officer had failed to have regard to all material considerations in taking this course of action, and that HM Customs & Excise should conduct a further review of their decision. At this point responsibility for customs as well as indirect taxes generally lay with HM Customs & Excise. In 2005 the

10 Staatssecretaris van Finacien v Joustra, Case C-5/05, 23 November 2006 11 “Blow to buying cheap drink online”, Financial Times, 24 November 2006 12 The background is discussed in, Cross border shopping and smuggling, Library

Research paper 02/40, 21 June 2002. 13 for example, HL Deb 8 February 2001 cc1266-1269; HL Deb 7 October 2002 cc4-6. 14 Lindsay v C&E Comrs [2002] EWCA Civ 267

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department was merged with the UK’s other revenue authority, the Inland Revenue, to form HMRC.

Following this judgement Treasury Minister Paul Boateng announced that Customs would revise its policy on vehicle seizure:

Barbara Follett: To ask the Chancellor of the Exchequer if HM Customs and Excise will change its vehicle seizure policy in relation to alcohol and tobacco smuggling as a result of the Court of Appeal decision in the Lindsay case.

Mr. Boateng: The Court of Appeal confirmed in the Lindsay case that Customs vehicle seizure and non-restoration policy in relation to those who smuggle alcohol and tobacco for profit was justified and proportionate. It also confirmed that vehicles used to smuggle on a non-profit basis were similarly liable to seizure. However, the Court considered that in not-for-profit cases a proportionate response, depending on the individual circumstances, would be to offer to restore such seized vehicles.

Accordingly when Customs detect commercial for profit smugglers, any vehicles used in such smuggling will remain subject to the existing tough seizure and non-restoration policy. However, Customs have now further developed their vehicle seizure policy, taking into account the clarification provided by the Court of Appeal.

When Customs detect not-for-profit smugglers their goods and vehicles will be seized but vehicle restoration will ordinarily be offered in the first instance for a sum equivalent to the revenue evaded. There will be a rising scale for any subsequent offences up to non-restoration. Customs will reserve the right to vary their restoration terms according to the aggravating or mitigating circumstances of any individual case.

This policy will allow Customs to continue their successful approach of hitting those who smuggle for profit with tough sanctions that strike at their illicit trade and also provides a real and proportionate penalty for those who break the law, albeit without such profit making motivation. It represents a fair and balanced policy.15

The European Commission was strongly critical of this approach to ‘not-for-profit smugglers’, and after an extended exchange of views with the UK Government, announced in October 2004 that it had referred the UK’s sanctions policy to the European Court of Justice, as a potential infringement of the EU Treaty.16 Following further discussions, and a change in Customs’ sanctions policy, in June 2006 the Commission announced that it had closed the case:

The Commission considered that two aspects of the UK's sanctions policies – those relating to the purchase of excise goods on behalf of a third party, and the importation of excise goods by post (referred to below as "irregular movement") - remained disproportionate where there were no aggravating circumstances…

15 HC Deb 2 May 2002 cc932-3W. Further details of the ‘sliding scale’ the department

would use were given in a press notice (HM Customs & Excise press notice PR34/02, 2 May 2002). In 2005 HM Customs & Excise was merged with the Inland Revenue to form HM Revenue & Customs.

16 European Commission press notice IP/04/1255, 20 October 2004

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Under the [UK’s] new policies, in such irregular movement cases, the UK will no longer systematically seize as liable to forfeiture the goods and cars of persons holding excise goods for purposes other than their own use. Instead, in first-time irregular movements without aggravating circumstances, the holder will be offered the option of holding on to his goods against payment of the duty plus a penalty. Where a car is used to carry the goods in such cases it will not be seized but the owner will normally be warned that it could be seized in any further cases.17

HMRC’s revised approach to vehicle seizure in these cases was set out in a written answer in September 2007:

Keith Vaz: To ask the Chancellor of the Exchequer what guidelines are given to Customs officers on the impounding of vehicles.

Jane Kennedy: Customs officers are instructed that a vehicle may be seized if it is or has been used to carry goods that are liable to forfeiture or if it is constructed, adapted, altered or fitted for the purpose of concealing goods and is or has been within the limits of a port, aerodrome or while in Northern Ireland, within the prescribed area.

Where a vehicle has been used to carry excise goods from another member state that are not for own use, but instead are intended to be sold to others on a reimbursement basis, then provided there are no aggravating circumstances and it is the first offence, Officers are instructed not to seize the vehicle but to warn the driver and owner that it is liable to forfeiture.

If a vehicle has been used to carry prohibited items then, providing the quantities involved are small and the vehicle was incidental to the offence, officers are instructed the vehicle should not normally be seized. Where any vehicle has been seized, it maybe restored under the powers set out in section 152 of the Customs and Excise Management Act, subject to such terms and conditions as the Commissioners may think fit.

Anyone who has goods or a vehicle seized and wishes to claim they were not liable to forfeiture may challenge the legality of the seizure by writing to any HMRC office with details of their claim within one month of the seizure. Anyone who requests restoration and is unhappy with the decision they receive may ask for that decision to be reviewed and, if still dissatisfied, may appeal the decision to the VAT and Duties Tribunal.18

When the rules covering personal imports were first introduced – the ‘Personal Reliefs Order’, or PRO for short - the onus of proof fell on the traveller to show that goods were for their own use, if their purchases exceed the guide levels.19 In July 2002 the High Court made an important judgement concerning Customs approach to stopping and searching travellers – commonly known as the ‘Hoverspeed’ case.20

The Court ruled that Customs officers had not had ‘reasonable grounds’ to stop a party of four travellers coming back to this country to assess whether the excisable goods they had purchased in France were for their own use, and that as a consequence Customs had not been

17 European Commission press notice IP/06/860, 28 June 2006 18 HC Deb 17 September 2007 cc2236-7W 19 Under paragraph 5(3) of SI 1992/3155 20 R (Hoverspeed) v C&E Comrs [2002] EWHC 1630 (Admin)

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entitled to seize both the goods and the car in which this party were travelling. In addition the Court ruled the PRO wrongly reversed the burden of proof requiring individuals to prove that they were not holding excise goods over the guide levels for a commercial purpose, and, as such, contravened EU law: specifically directive 92/12/EEC implementing common arrangements for charging excise duty.21

On 29 October 2002 Treasury Minister John Healey announced the PRO would be repealed, removing the burden of proof on the individual – to bring UK law into line with the court ruling in the Hoverspeed case.22 Under the new rules it would be for Customs officers to be satisfied that goods were for a commercial purpose. To effectively define shopping and smuggling, the regulations would specify that ‘own use’ includes ‘use as a personal gift’, and that goods would be regarded as being ‘held for a commercial purpose’ if the goods were ‘transferred to another person for money or money’s worth (including any reimbursement of expenses incurred in connection with obtaining them), or the person holding them intended to make such a transfer.’23 The guide levels for tobacco were increased from 800 to 3,200 for cigarettes (equivalent to 6 months supply for the average smoker) and from 1 kg to 3 kg for hand-rolled tobacco. Initially the guide level for wine – set at 90 litres – had specified that no more than 60 litres could be sparkling wine. This restriction on sparkling wine was removed.24

The regulations retained the list of factors set out in the PRO that Customs officers could take into account when determining if goods are for someone’s own use or not. In addition Customs officers were still empowered to seize smaller quantities of goods than the guide levels if other information satisfied them that in an individual case the goods are for resale. These changes were not retrospective.25

Although Customs accepted that the PRO was incompatible with European law, it decided to appeal against another part of the Court’s ruling in the Hoverspeed case. The Court had ruled that Customs officers had to have “reasonable grounds for suspecting the individual of holding goods bought in another member state for commercial purposes before he could lawfully be stopped and searched.” In the absence of “such suspicion on an individualised basis” Customs had no right to stop and search travellers. There was speculation that the judgement might result in other travellers successfully suing Customs for goods that had been seized on their returning to the UK.26 In its appeal Customs argued that although travellers could not be checked in a

21 In December 2002 Customs successfully appealed against one further aspect of the

Court’s ruling; this is discussed below. 22 HM Customs & Excise press notice NR83/02, 29 October 2002; HC Deb 29 October

2002 cc686-688. The regulations to effect this change (SI 2002/2691 & SI 2002/2692) were debated at some length (Third Standing Committee on Delegated Legislation, 21 November 2002).

23 This wording is retained in the current regulations – specifically, reg13(5)(b) of SI 2010/593.

24 HM Customs and Excise press notice NR84/02, 29 October 2002 25 The Minister underlined this in a Westminster Hall debate on this issue at the time: HC

Deb 30 October 20002 cc314-322WH. 26 for example, “Customs torpedoed”, Tax Journal, 12 August 2002 & “Searching for

proof”, Solicitors Journal, 13 September 2002

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‘blanket’ or ‘automatic’ fashion, it was lawful – under both EU and UK law – to select a traveller for checking because their particular circumstances matched an established profile or trend. The Court of Appeal upheld this argument on the proviso that Customs “must always be careful not to succumb to sterile or unfounded stereotypes.”27

The Court of Appeal also overturned a second aspect of the original ruling. The Divisional Court had found that in this particular case Customs officers had had invalid reasons to stop and check this party. It went on to reason that since the check was invalid, the ensuing seizure of goods was invalid too. In addition the seizure of goods constituted a disproportionate interference with the freedom of movement or property. This aspect of the Court’s ruling – had it stood – would have represented an opportunity for many other travellers to claim compensation from Customs for goods seized – should Customs have been unable to prove in their own case that officers had had reasonable grounds to stop them. Indeed, a backlog of cases had built up, as both defendants and Customs awaited the outcome of this appeal. In the event the Court of Appeal found this line of reasoning specious.

The Government’s response to the judgement was set out in a press notice:

A Court of Appeal ruling today gave cross-Channel shoppers further clarity about their rights to shop across the EU with the minimum of interference and reinforced and backed the Government's approach to tackling smuggling …

The ruling was welcomed by Government and confirms:

• Customs checks are not random but are based on reasonable grounds;

• Smuggled goods are liable to seizure whenever they are found;

• Tobacco and alcohol brought in for sale, even if it is not for profit and even if it is for payment in kind rather than cash, is not 'own use' and the goods can be seized.

• Customs Minister John Healey said: "... The court has confirmed that our Customs regime is lawful, fair and reasonable. With the package of new measures I introduced in October and the backing of this court judgment, we can ensure minimum interference for honest shoppers but continue our drive to stamp out cross-Channel smuggling ..."28

In October 2004 Hoverspeed Ltd served a claim against Customs in respect of the impact on their business of the latter's activity to tackle cross-channel smuggling of alcohol and tobacco. In January 2006 the department announced that it had reached a settlement with the company out of court.29

27 Commissioners of Customs and Excise v Hoverspeed Ltd & Ors [2002] EWCA Civ 1804.

See also, “Law report: Customs can use profiles”, Times, 16 December 2002 28 HM Customs & Excise press notice NR102/02, 10 December 2002 29 HM Revenue & Customs press notice NAT 03/06, 19 January 2006

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1.3 Transitional arrangements for new Member States (2004-2009)

On 1 April 2004 Treasury Minister John Healey announced that certain restrictions would be maintained on duty-paid purchases of tobacco from eight EU accession states. Under their accession agreements, these states were allowed transitional periods in which to meet EU minimum duty rates on certain tobacco products. (EU law sets minimum duty rates for all excisable goods: that is, alcohol, hydrocarbon oils and tobacco products.30) However, until these rates were reached, other Member states would be entitled to maintain the restrictions currently applied to travellers arriving from outside the EU. The Minister’s statement is reproduced below:31

I am today laying regulations confirming the introduction of quantitative restrictions on travellers bringing tobacco products from those new EU member states taking advantage of a derogation allowing them to delay meeting minimum duty levels on certain tobacco products.

• The restrictions will apply from 1 May to the following:

• cigarettes bought duty-paid in the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia;

• manufactured tobacco products1 bought duty-paid in the Czech Republic; and

• smoking tobacco2 bought duty-paid in Estonia.

Where new member states take advantage of the derogation, existing member states are entitled to maintain the same restrictions on the import of cigarettes and some other tobacco products bought in those countries for a traveller's own use, as are currently applied to travellers arriving from third countries, including the new member states.

The Excise Duty Points (Etc.) (New Member States) Regulations 2004, the Customs and Excise Duties (Travellers' Allowances and Personal Reliefs) Order 2004 and the Channel Tunnel (Alcoholic Liquor and Tobacco Products) (Amendment) Order 2004 allow the UK to maintain these restrictions. After Accession on May 1, travellers to the UK bringing in tobacco products from the countries covered by the regulations will be restricted, as they are currently, to a limit of 200 cigarettes, or, in the case of Estonia, to a limit of 200 cigarettes or 250 grams of smoking tobacco; or, in the case of the Czech Republic, to a limit of 200 cigarettes or 50 cigars or 100 cigarillos or 250 grams of smoking tobacco.

While the EU minimum duty rates are not met, uncertainties over the impact of EU Enlargement on excise smuggling and cross-border shopping are also heightened. The Government will therefore review both the operational and principled justification for retention of quantitive restrictions after 12 months in light of developments in smuggling and shopping patterns, and in light of progress made by the new member states to comply with the

30 The Commission provides an overview of these rules on its site. 31 HC Deb 1 April 2004 cc 106-7WS. Further details were given in a press notice

accompanying this statement (HM Customs & Excise press notice, Tobacco restrictions for travellers returning from some new EU Member States, 1 April 2004).

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minimum duty levels. Customs and Excise has plans in place to explain the restrictions to the travel industry and general public. 1 Manufactured tobacco products includes cigars, cigarillos and smoking tobacco. 2 Smoking tobacco is hand rolling tobacco (HRT) and pipe tobacco.

The three statutory instruments mentioned in the Minister’s statement were laid at this time, and came into force on 1 May 2004.32 When this legislation was considered by the House, the Minister discussed the potential threat of tobacco smuggling from those accession states that had not introduced the minimum EU duty rates on these products:

Enlargement potentially damages the continued success of that strategy, because we cannot be certain how smuggling patterns will react. The risks appear to be significant because of the potential smuggling profits of air passenger smuggling … the price of a typical packet of 20 cigarettes is 40p in Latvia, 55p in Lithuania and 65p in Poland. In the current EU, the lowest price for a packet of 20 cigarettes is £1.40 …

Although quantitative restrictions will not influence the actions of the large-scale smugglers, those that use containerised freight traffic to smuggle their goods—the vast majority of tobacco smuggling in this country is through freight, not through passenger traffic—it is simply not safe to assume that organised air passenger smuggling will be unaffected. Those low-duty rates, low prices and low costs of travel mean that the new member states must be seriously considered as attractive destinations, not just for low-level individual smugglers and bootleggers but for the organised gangs that operate and run air passenger courier smuggling operations.

Members of the Committee may be interested to know that five other member states—Belgium, Denmark, Finland, Germany and Sweden—have said that they intend to take up the option of applying the restrictions that we are considering. Austria has indicated that it is likely to maintain the quantitative restrictions that already apply. In addition, France and Ireland are still considering their position.33

The Minister also explained why these provisions dealt with tobacco products only:

The measures are confined to certain tobacco products in certain countries because there is no derogation in place for the 10 accession states not to meet the minimum duty levels for alcohol from Saturday. Therefore, there is no corresponding decision for us to take on putting a complementary measure in place.34

In November 2006 the Minister announced similar transitional arrangements for two new accession States:

I am today laying legislation confirming the introduction of quantitative restrictions on travellers bringing cigarettes from the newest EU member states, who are taking advantage of a derogation allowing them to delay meeting minimum duty levels on cigarettes.

32 SI 2004/1002, SI 2004/1003, SI 2004/1004 33 Eighth Standing Committee on Delegated Legislation, 29 April 2004 cc4-5 34 op.cit. c15

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The restrictions will apply from 1 January 2007 to cigarettes bought duty-paid in Bulgaria and Romania. From that date travellers to the UK bringing in cigarettes from Bulgaria and Romania will be restricted, as they are currently, to a limit of 200 cigarettes.

The Excise Duty Points (Etc.)(New Member States) (Amendment) Regulations 2006 and the Customs and Excise Duties (Travellers’ Allowances and Personal Reliefs) (New Member States) (Amendment) Order 2006 allow the UK to maintain these restrictions on travellers who are bringing back cigarettes from Bulgaria or Romania. The Relief for Legacies Imported from Third Countries (Application) Order 2006 makes consequential amendments to the Customs and Excise Duties (Personal Reliefs for Goods Permanently Imported) Order 1992 (SI 1992/3193) so that its territorial application includes Bulgaria and Romania.

While the minimum duty rates are not met, concerns and uncertainties over the impact of EU enlargement on excise smuggling and cross-border shopping are heightened. Therefore where new member states take advantage of a derogation, existing member states are entitled to maintain the same restrictions on the import of cigarettes bought in those countries for a travellers’ own use, as are currently applied to travellers arriving from third countries.

Imposing restrictions in respect of Bulgaria and Romania will maintain consistency of approach taken by the UK with other countries that have yet to reach the EU minimum rates of duty, extending to Bulgaria and Romania the current restrictions imposed on eight countries that joined in 2004.

These restrictions will provide certainty for both travellers and HM Revenue and Customs (HMRC) officers, and will also reduce the frontline cost of countering smuggling. Once the legislation is passed HMRC has plans in place to explain the restrictions to the travel industry and general public.35

When these provisions were debated in Standing Committee, Mr Healey noted that restrictions would apply to cigarettes only because “both Bulgaria and Romania are already meeting the EU minimum rate in relation to [other tobacco products and alcohol].”36 He also explained that since the debate in Committee on the Order’s predecessor, both Austria and Ireland had also introduced quantitative restrictions.

As noted above, these country-specific limits were transitional, dependent on each country’s progress toward harmonising their duty rates with the EU minimum, and the last of these arrangements expired at the end of 2009.37

35 HC Deb 29 November 2006 c105WS 36 Fourth Standing Committee on Delegated Legislation, 12 December 2006 c3 37 No equivalent transitional provisions were introduced with regard to the accession of

Croatia into the EU from 1 July 2013 (HMRC, Excise Information Sheet (13) 04: Accession of Croatia to the European Union on 1 July 2013, June 2013).

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2. Brexit and the UK regime from 1 January 2021

Following the ratification of the Withdrawal Agreement and the UK’s departure from the EU on 31 January 2020, the UK has remained within the Single Market, compliant with EU law, during the ‘transition period’ – the period set for the UK and the EU to complete a new trade agreement.38 In anticipation of the transition period ending on 31 December, in the 2020 Budget the Government announced that it would consult on the “potential approach to duty- and tax-free goods policy after the transition period following the UK’s departure from the EU.”39 This consultation was launched at this time; the deadline for responses was 20 May. The document set out the context for the consultation …

The UK has left the European Union (EU) and entered a transition period. The question for the rest of 2020 is whether the UK and the EU can agree a deeper trading relationship on the lines of the free trade agreement (FTA) the EU has with Canada, or whether the relationship will be based simply on the Withdrawal Agreement deal agreed in October 2019, including the Protocol on Ireland / Northern Ireland. In either event the UK will be leaving the single market and the customs union at the end of this year and stakeholders should prepare for that reality.

… and the Government’s priorities for reform:

This policy area focuses on the reliefs from VAT and excise duty that currently apply to certain types of goods sold to passengers for export or those that are imported into the UK by passengers. Currently these reliefs are largely set out in EU legislation.

There have been calls for changes to the UK’s duty-free and tax-free regimes following our exit from the EU. Given the significant complexities associated with any changes to the duty-free rules, the government is seeking views from stakeholders to help understand the impacts that any changes could have, to help inform any future policy decisions.

The government has a number of objectives relating to passengers after the transition period, and any changes would need to take these into account:

• minimising disruption at exit and entry points

• minimising delivery challenges and expensive and time-consuming infrastructure changes

• minimising revenue loss, particularly via tax evasion or avoidance.40

38 For a narrative of events up to the UK’s departure from the Single Market on 1

January 2021, see, Brexit timeline: events leading to the UK’s exit from the European Union, Commons Briefing paper CBP7960, 6 January 2021.

39 Budget 2020, HC 121, March 2020 para 2.236 40 HMT/HMRC, A consultation on the potential approach to duty- and tax-free goods

arising from the UK’s new relationship with the EU, March 2020 p2

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A more detailed description of the regime, taken from this consultation document, is given in an annex to this paper.41

Following the end of this consultation, on 11 September the Exchequer Secretary, Kemi Badenoch, gave a Ministerial Statement setting out in detail the Government’s plans for the VAT and excise regime for goods carried across borders by passengers. The Minister’s statement is reproduced in full below:

Kemi Badenoch: The Exchequer Secretary to the Treasury

The UK has left the European Union and entered a transition period. In light of this new relationship the government has reviewed the excise duty and VAT treatment of goods purchased by individuals for their own use and carried across borders in their luggage. The government is today announcing the rules which will apply to goods carried across borders by passengers travelling to and from Great Britain to countries outside of the United Kingdom. These changes will apply from 1 January 2021 when the transition period comes to an end.

Currently these reliefs are largely set out in EU legislation, with different rules for those travelling to or from the EU, and those travelling to or from non-EU countries. This will have to be aligned following the transition period so that EU and non-EU passengers are treated equally. At Spring Budget, on 11 March 2020, the government published a consultation on the potential approach to goods carried across borders by passengers. There were a range of views and evidence submitted in response to that consultation and the government has had to balance competing policy objectives, while taking into account the views of stakeholders. A full summary of responses to the consultation has been published alongside this statement.

This announcement focuses primarily on the treatment in GB. The government continues to work with the Joint Committee on the implementation of the Northern Ireland Protocol. The government is also committed to providing guidance on how the Northern Ireland Protocol will work, including for duty-free and tax-free goods, ahead of the end of the transition period.

The government will make and lay a Statutory Instrument subject to the negative procedure before the House of Commons in due course to give effect to these changes from 1 January 2021. The below summarises the final policy decisions.

Duty-free sales and personal allowances

The government is taking advantage of the opportunity provided by the UK’s new relationship with the EU to enable passengers travelling from GB to the EU to purchase duty-free excise goods once they have passed security controls at airports, ports, and train stations on international routes, on the same basis as currently applies to passengers travelling to non-EU destinations.

This means passengers travelling from GB won’t have to pay UK VAT and excise duty on these purchases of alcohol and tobacco products when they travel to an EU destination. They will also be able to purchase duty-free goods on-board planes on international routes, on international train journeys and ships sailing from GB to a destination outside the UK for consumption

41 HMT/HMRC, A consultation on the potential approach to duty- and tax-free goods

arising from the UK’s new relationship with the EU, March 2020 (Annex A)

16 Passenger purchases of alcohol and tobacco

on-board and to take-away. This is something that many businesses have raised as part of the consultation and the government will implement this as soon as the transition period ends.

At the same time, passengers travelling to GB from the EU will no longer be able to bring back unlimited amounts of alcohol, tobacco, or other goods (for example, clothing and electronics) for personal use without making a declaration and paying the relevant taxes. Passengers will instead have the option to bring in defined amounts of alcohol, tobacco and other goods purchased from duty- or tax-free shops, or with tax and duty paid on the high street, in the EU without paying the relevant taxes and duties on entry to GB.

These personal allowances currently apply to non-EU countries and the government is now ensuring that EU and non-EU passengers are treated equally. The government is also using its new freedoms to significantly increase the current allowances for alcohol for passengers arriving from both EU and non-EU countries. This will allow a reasonable amount of alcohol to be brought into GB, for example three crates of beer, two cases of still wine and one case of sparkling wine, without the relevant taxes being due. The current levels of allowances will remain for tobacco products and all other goods.

Tax-free sales under the airside extra statutory concession

Currently airside tax-free sales of non-excise goods are permitted under an extra statutory concession for those travelling from the UK to non-EU countries. The government made clear in the consultation that it had a number of concerns over how the benefit is passed on to passengers and that in some instances the relief is not consistent with international tax principles. As such, the government is not extending tax-free sales to passengers travelling to the EU but is instead withdrawing tax-free sales across the UK for all passengers from 1 January 2021.

The VAT Retail Export Scheme

Similarly, the VAT Retail Export Scheme will not be extended to EU visitors and will be withdrawn for non-EU visitors in GB from 1 January 2021. This means that overseas visitors will no longer be able to obtain a VAT refund on items they buy in GB and take home with them in their luggage. The VAT Retail Export Scheme is a costly relief which does not benefit the whole of GB equally, with current use of the scheme largely centred in London. Retailers will instead continue to be able to offer VAT-free shopping, consistent with international principles of taxation, to non-EU visitors who purchase items in store and have them delivered direct to their overseas addresses. Following the end of transition period, this will also be available to EU visitors.42

As noted in the Minister’s statement, the Government proposed to set the same allowances for personal imports for all travellers coming to the UK. Some respondents had argued that it would be sensible that allowances set for alcohol imports to be based on the current ‘minimum indicative levels’ (MILs) for passengers coming from the EU. The Government agreed with the case for setting higher allowances for alcohol imports, although not with setting them as high as this:

42 Written Statement - HCWS448, 11 September 2020. See also, HM Treasury press

notice, Duty Free extended to the EU from January 2021, 11 September 2020

17 Commons Library Briefing, 18 January 2021

2.7 The government notes that the majority of stakeholders feel that personal allowances should be extended to passengers travelling from the EU at the current levels for those travelling from non-EU countries. This would not affect passengers who are used to travelling to GB from non-EU countries but would be a change for those travelling to GB from the EU, especially for those who travel in their own vehicle by ferry or train.

2.8 The government also notes the health concerns raised by some stakeholders regarding the current levels of tobacco and alcohol allowances, and the feeling that they should be reduced. However, The UK has the second highest excise duty rates in the EU. This means that under current rules that people can travel to an EU Member State, buy tobacco and alcohol products and bring in unlimited amounts for personal use.

Many passengers currently purchase significant quantities of alcohol and tobacco to bring into the UK because duty rates in the EU are typically below the UK’s. Following the transition period, the introduction of allowances for those entering GB from the EU is therefore likely to reduce the amount of alcohol and tobacco being brought into GB from the EU.

2.9 While in the minority of respondents, the government recognises that some stakeholders who may be most impacted by the introduction of allowances have requested a significant increase in the alcohol allowance (while also 7 suggesting that tobacco allowances remain at current levels). Many of these respondents used the intra-EU MILs as a guide for the level of this increase. For example, such an approach would see an increase in the still wine allowance from 4 litres to 90 litres, and from 16 litres to 110 litres for beer.

2.10 MILs are one of a number of factors used by Border Force in determining whether alcohol and tobacco products imported from the EU are for a person's own use or are for commercial use. They are not allowances – a passenger bringing in less than the MILs to re-sell is still breaking the law, and a passenger who can evidence that they are bringing in more than the MILs for their own use would be unaffected. Furthermore, MILs are used only for tax- and duty-paid goods. As such, the government’s view is that MILs are inappropriate to be used as the allowances for the amount of goods that passengers can bring into GB without paying tax or duty.

2.11 However, the government understands the impacts that the introduction of current non-EU allowances may have, particularly on those stakeholders that deal with large volumes of EU passengers travelling to GB in a vehicle by ferry or train. While passengers will no longer be able to bring in unlimited amounts of tax- and duty-paid goods for their own use, the government is using its new freedoms to significantly increase the current allowance levels for alcohol for all passengers. This means that each passenger will be able to bring back, for example, three crates of beer, two cases of still wine and one case of sparkling wine to GB without paying UK duties. The current non-EU allowances will apply to existing categories of tobacco and all other goods for all passengers.

2.12 The government also believes the suggested allowance of 200 sticks for ‘heated tobacco’ is appropriate, given that it is equivalent to the allowance for ‘conventional’ cigarettes, and will introduce this category of allowance following the transition period.

18 Passenger purchases of alcohol and tobacco

Table 1.A outlines the allowances that will apply to all passengers entering GB from EU and non-EU countries from 1 January 2021:

2.13 Current allowances for non-EU passengers apply equally to goods purchased with tax and duty paid in the country of origin, and to goods purchased free of tax and duty in export shops in, for example, airports. This will continue to be the case for personal allowances for both EU and non-EU passengers from 1 January 2021. This means that if passengers bring in goods over their allowance, they must declare them. Passengers will need to declare and pay tax on all goods they are bringing in within the relevant category, not just those that exceed their allowance within that category.43

The majority of respondents supported the case for extending duty-free sales to all travellers leaving the UK, although the Government acknowledged that some respondents had raised concerns as to the health implications of this reform:

3.6 Following the transition period WTO rules broadly require the government to treat goods carried by passengers bound for different destinations equally, which would entail either removing completely duty-free sales or extending them for EU-travel. Offering duty-free sales to passengers travelling to the EU would ensure parity of treatment with passengers travelling to non-EU countries. It would also put GB on an even footing with the EU, which has said it will allow duty-free shopping for passengers travelling to GB from 1 January 2021.

3.7 The government is therefore taking advantage of the opportunity provided by the UK’s new relationship with the EU to enable passengers travelling from GB to the EU to purchase duty-free goods at airports, ports, and international rail terminals. This means passengers travelling to the EU won’t have to pay UK tax and excise duties on alcohol and tobacco products which they purchase and take abroad with them in their luggage. They will also be able to purchase duty-free goods on-board planes on international routes, on international train journeys and ships sailing from GB for destinations outside the UK for consumption on-board and to take-away. This is something that many have raised as part of the consultation and it is something that the government will implement as soon as the transition period ends.

43 HMT/HMRC, A consultation on the potential approach to duty- and tax-free goods

arising from the UK’s new relationship with the EU: summary of responses, September 2020 pp6-8

19 Commons Library Briefing, 18 January 2021

3.8 The government also notes the health concerns raised by some stakeholders. Although passengers will be able to purchase duty-free goods on their way to the EU, passengers on most routes will be limited to what they can carry, and will be required to pay import taxes and duties on arrival in the EU if bringing in goods over EU personal allowances. This will also apply to any passengers returning to GB with duty-free goods as the government is 11 removing the ability to bring back unlimited duty-paid alcohol and tobacco for personal use.44

By contrast a majority of respondents raised objections to the idea of scrapping the VAT RES and the airside extra statutory concession (ESC).

In the first case, “the main arguments against abolition were that the scheme is felt to incentivise overseas visitors to spend more during their visit and there was a feeling that sales may be displaced to other countries … Instead, these respondents want to see the VAT RES extended to the EU in digital form.” However, the Government argued that “the scheme is an imperfect way to ensure that VAT is paid in the place of consumption, not least due to the risk of fraud and non-compliance”:

It is clear that the VAT RES is an inefficient method of seeking to achieve taxation in the place of consumption. It is also a costly system to maintain with unclear economic benefits and is burdensome for exit points. While stakeholders feel the scheme has benefits for the high-street, it does not benefit the whole of GB equally, with purchases largely centred in London.

The government is therefore withdrawing the VAT RES in GB from 1 January 2021. This means that non-EU residents will no longer be able to obtain a VAT refund on items they buy in GB and take home with them in their luggage. Retailers will instead continue to be able to offer VAT-free shopping, consistent with international principles of taxation, to non-EU visitors who purchase items in store and have them sent direct to their overseas addresses. Following the end of transition period, this will also be available to EU visitors.45

In the second case, “respondents opposed the abolition of the scheme and supported the extension of tax-free sales, especially at a time when airside retailers are dealing with COVID-19 disruption”:

Respondents argued that airside tax-free sales can offset their operating costs, can contribute to lower retail prices across the board and that customers expect this treatment to be extended to EU travel … Other respondents argued that the more non-aeronautical revenue an airport receives (for example through both tax-free and tax-paid sales in retailers), the greater the opportunity for airport operators to be competitive and offset operating costs for their partners.46

The Government’s case for withdrawing this relief was set out as follows:

The government is concerned that the current rules under the ESC are applied inconsistently (for example applied to goods for immediate consumption that are not exported) and about how

44 op.cit. pp10-11 45 op.cit. para 3.12-3, para 3.15, para 3.20 46 op.cit. para 3.22-4

20 Passenger purchases of alcohol and tobacco

this would apply if legislation were implemented to permanently allow this relief.

The rules also allow for tax-free sales to UK residents who can use the scheme for goods that will likely be brought back to the UK. For example, a UK-resident 15 passenger could purchase a camera VAT-free on departure, and then bring the camera back into the country on return for long-term use, without tax having been accounted for. This is not consistent with international tax norms, in which VAT and excise on goods should be paid in the country of consumption.

The government is also concerned that the VAT saving is not consistently passed directly on to consumers, and that this would continue to be the case. As such, the government will permanently withdraw tax-free sales from 1 January 2021.47

The response document confirmed statutory provision for these reforms would be made by “Statutory Instrument subject to the negative procedure before the House of Commons in due course to give effect to these changes from 1 January 2021.”48 The response document made no mention of the Exchequer impact of these reforms. At this time Ministers stated estimates would be published and verified by the OBR in its next economic forecast,49 though later PQs gave some figures for the Exchequer cost of both the VAT RES and airside ESC.50

Initially most of the responses to this reform focused on the proposals to end the VAT RES and the airside ESC, and the impact this would have on some retailers,51 and airports.52

On 7 October the Treasury Committee held a hearing as part of its ongoing inquiry on tax after Coronavirus, and this issue was one of the topics discussed.53 In turn the Chair of the Committee Mel Stride wrote to the Chancellor to asked for details of the Treasury’s cost benefit analysis of these measures.54 A copy is reproduced below:

As you know the Government announced on 11 September the outcome of its consultation on the Duty Free rules to apply at the end of the transition period. It also confirmed that no VAT or duty will be payable on excise goods (tobacco and alcohol) when bought after passengers have passed security controls on international routes (“airside”).

The Treasury Committee has heard evidence that ending both the VAT retail export scheme (VAT RES) and the airside Extra Statutory Concession, which allows goods to be purchased VAT free in airside shops, may cause very significant financial loss to retailers serving the tourism sector, particularly at a time when they are

47 op.cit. para paras 3.26-7 48 op.cit. para 1.13 49 PQ91820, 28 September 2020; PQ91819, 28 September 2020 50 PQ100884, 13 October 2020; PQ91898, 11 November 2020; PQ114157, 16

November 2020 51 See, for example, “UK retailers look to challenge scrapping of VAT relief for overseas

visitors”, Financial Times, 14 September 2020; “Chancellor warned scrapping tax-free shopping risks 70,000 jobs”, Guardian, 20 September 2020

52 PQ91047, 21 September 2020 53 Treasury Committee, Oral evidence: Tax after coronavirus, HC 664, 7 October 2020

(see Qs 169-182) 54 Treasury Committee press notice, Government should provide cost benefit analysis

of its VAT increases, 8 October 2020

21 Commons Library Briefing, 18 January 2021

already suffering considerable stress due to the impact of Covid-19. In a Treasury Committee evidence session on 7 October, witnesses raised concerns about the consultation process behind these changes, particularly that it was not made clear that abolition was the leading option.

An announcement of this nature would usually be made at a fiscal event and would be published with the accompanying costings. I would be very grateful if you could provide the Committee with the cost benefit analysis behind these decisions.55

The Minister replied to the Committee’s letter on 6 November, and the body of their response is reproduced below:56

As you state in your letter, announcements of this nature would usually be made at a fiscal event with the accompanying costings. However, the Government has announced these changes now to give individuals and businesses as much time as possible to prepare ahead of these changes coming into effect from 1 January 2021.

This announcement follows a consultation on the potential approach to duty-free and tax-free goods that would apply in Great Britain following the end of the transition period. The consultation was announced at the Budget in March 2020 and ran from 11 March to 20 May 2020. It explored a broad number of options, including the potential withdrawal of the VAT Retail Export Scheme and tax-free airside sales. The consultation response, published on 11 September, sets out in detail the rationale for the decision to withdraw the VAT Retail Export Scheme and tax-free airside sales.

I have studied with interest the transcript of your Committee’s proceedings of 7 October at which the VAT Retail Export Scheme change was discussed. I note that of the three witnesses questioned, one declined to speculate as to the impact on tourism; the second admitted he had not thought about it in any detail; and the third thought that if tested in an opinion poll, the change would be supported by everyone.

The Government has also put together a technical note to provide further detail, a copy of which is enclosed.

It might be helpful if I summarise the cost analysis points in response to your request.

• In order to remain compliant with World Trade Organisation rules following the transition period, the UK’s VAT and excise regime will no longer be able to treat individuals carrying goods for personal use (passengers) to or from the EU differently to those travelling to or from non-EU countries. Therefore the Government does not have the choice of maintaining the policies as they stand today.

• In the case of the VAT Retail Export Scheme and tax-free airside sales, the choice is between extending the treatment to EU residents or withdrawing the schemes completely.

• The VAT Retail Export Scheme is very costly in terms of refunds. HMRC estimate such refunds cost around £0.5

55 Treasury Committee, Correspondence with the Chancellor related to VAT RES and

the airside Extra Statutory Concession, 8 October 2020 56 Treasury Committee, Letter from the Exchequer Secretary to the Treasury relating to

the VAT Retail Export Scheme and tax-free airside sales, dated 6 November 2020

22 Passenger purchases of alcohol and tobacco

billion for around 1.2 million non-EU visitors at UK exit points in 2019. At the margin, this may of course affect demand for these goods and could impact incentives for a small proportion of non-EU residents to visit the UK – however, fewer than one in ten non-EU visitors use the VAT Retail Export Scheme.

• The Office of National Statistics estimate there were substantially more EU visitors (24.8 million) than non-EU visitors (16.0 million) to the UK in 2019. This implies an extension of the VAT Retail Export Scheme to the EU could significantly increase the cost of the scheme by up to an estimated £0.9 billion. This would result in a large amount of deadweight loss by subsidising spending from EU visitors which already happens without a refund mechanism in place, potentially taking the total cost up to around £1.4 billion per annum.

• HMRC estimate that around £150 million of VAT is not charged as a result of tax-free airside sales. Again, extending the relief to the EU would significantly increase the cost and result in a large amount of deadweight loss by subsidising spending from EU-bound passengers which already happens. At the same time as removing this concession from 1 January 2021, the Government has decided to extend duty-free sales to EU-bound passengers for the first time in over 20 years.

This will be a significant boost to all airports and international rail terminals in England, Scotland and Wales, including smaller regional airports and rail hubs which have not been able to offer duty-free to the EU before. According to data from the Civil Aviation Authority, in 2019, 24 out of 29 airports in the UK had significantly more flights to the EU than non-EU destinations, with intra-EU travel clearly making up most of the passenger travel from the UK.

The independent Office for Budget Responsibility will also set out their assessment of the fiscal impact at the next forecast in November.

The Minister’s letter included a technical note that HM Treasury had issued to stakeholders to expand on the Government’s response to the consultation, and this is reproduced in full in an annex to this paper.57

The Office for Budget Responsibility published its most recent economic and fiscal forecast on 25 November, coinciding with the Chancellor’s Spending Review.58 This presented costings of the abolition of VAT RES and the airside ESC over the five year period 2021/22 to 2025/26, which put the cost Exchequer gain at £1.8 billion, and £800m respectively, although the OBR noted the figures were subject to some uncertainty:

A.22 Abolition of the VAT Retail Export Scheme (RES): this scheme allows individuals from parts of the world other than the EU to claim back VAT on goods purchased in Great Britain. Abolishing it brings the treatment of tourists from outside the EU into line with those from the EU from the end of the transition period (as opposed to extending the scheme to EU tourists).

57 See also, PQ91898, 11 November 2020 58 HM Treasury, Spending Review 2020, CP330, November 2020

23 Commons Library Briefing, 18 January 2021

Alignment is a requirement of WTO rules. Most VAT RES beneficiaries do their shopping in luxury stores, particularly those in London and the South East, with 90 per cent of refunds from London and Oxford (Bicester Village). Ending the scheme results in a direct Exchequer saving – around £0.5 billion was refunded through the scheme in 2019 – but there will also be costs as the UK becomes less attractive for affected tourists relative to alternative EU destinations such as Paris or Milan. Estimates of the sensitivity of tourism to price changes generally refer to tourism in general rather than those focused on luxury shopping. The costing takes one UK-specific estimate relating to tourism in general59 and scales it up by 50 per cent (to an elasticity of 1.9) in recognition of the likely greater responsiveness of those affected by the measure. This reduces the yield slightly, but the estimate is highly uncertain. Several studies have considered the negative consequences of this measure for affected industries. Our forecasts consider such indirect effects at an aggregate level, looking at overall changes in tax and spending (worth tens of billions of pounds at this forecast) rather than measure-by-measure.

A.23 Abolition of Tax-Free airside shopping: this measure also aligns the UK with WTO rules. Tax-free airside shopping is currently available for those travelling to destinations outside the EU, but this will be abolished at the end of the transition period. The main impact will be on the sales of beauty products (perfumes and cosmetics) that generate around half of total sales in duty free shops. The yield from this is again subject to uncertainty around the behavioural response. It is not clear how much of the tax rise will be passed through to the prices faced by consumers or the degree that any price rises will reduce sales.60

Statutory provision to implement this package of reforms was made by Order.61 HMRC published a tax information & impact note on this legislation which, along with estimates of the Exchequer gain from withdrawing the VAT RES, put the total cost of extending out-bound duty free, and setting new inbound personal allowances, at £890m and £20m respectively, over the six year period 2020/21 to 2025/26.62 HMRC has also published guidance on the withdrawal of both schemes.63

It is important to note that the Government’s consultation did not consider in any detail the position of Northern Ireland.64 As part of the Withdrawal Agreement (WA) the UK and the EC agreed provisions for Northern Ireland’s relationship with both at the end of the transition period – the Northern Ireland Protocol. The principle purpose of the Protocol is to maintain the open border between Ireland and Northern

59 A price elasticity of 1.28, cited in The Impact of Taxes on the Competitiveness of

European Tourism – Final Report, PWC, October 2017 60 OBR, Economic & Fiscal Outlook, CP 318, November 2020 p181 (Table A7), p183.

See also, Treasury Committee, Letter from Financial Secretary to the Treasury relating to Tax Announcements, 2 December 2020.

61 SI 2020/1412. The regulations were approved under the ‘negative procedure’ and agreed without debate.

62 HMRC, The Travellers’ Allowances and Miscellaneous Provisions (EU Exit) Regulations 2020, 3 December 2020

63 HMRC, Revenue and Customs Brief 21 (2020): withdrawal of the VAT Retail Export Scheme and the tax-free shopping concession, 11 December 2020

64 HMT/HMRC, A consultation on the potential approach to duty- and tax-free goods arising from the UK’s new relationship with the EU: summary of responses, September 2020 para 1.4

24 Passenger purchases of alcohol and tobacco

Ireland, and the WA established a Joint Committee to determine how the Protocol would work in practice. On 10 December, a few days prior to the UK and EC announcing the Trade Cooperation Agreement to apply from 1 January 2021,65 the Joint Committee announced the outcome of its negotiations, and the Government published a Command Paper setting out the practical implications for goods.66 With regard to personal imports of excise goods, the regime that applied for imports from the EU that used to apply across the UK is retained for Northern Ireland, as HMRC’s guidance confirms:

The Northern Ireland Protocol means that Northern Ireland maintains alignment with the EU VAT rules for goods, including on goods moving to, from and within Northern Ireland. However, Northern Ireland is, and will remain, part of the UK’s VAT system.

HMRC will continue to be responsible for the operation of VAT and collection of revenues in Northern Ireland. …

Moving personal goods in your baggage

From Northern Ireland to Great Britain

No VAT will be due, as long as you have not claimed a VAT refund.

Into Northern Ireland from Great Britain

In most cases, no VAT will be due. In very a limited number of circumstances, you may have to pay import VAT.

Into Northern Ireland from the EU

There will be no change to the current rules. No tax or duty will be due on personal goods carried into Northern Ireland from the EU if they are for personal use or to give as a gift.

Into Northern Ireland from outside the EU

For visitors arriving in Northern Ireland from outside the EU (not including Great Britain), the current duty free allowances will apply.67

As with the changes to the rules for passenger purchases to and from Great Britain, statutory provision for this was made by Order.68 One other aspect of the rules is that passengers leaving Northern Ireland to Great Britain will not be entitled to buy duty free goods – as noted in this written answer:

Baroness Hoey : To ask Her Majesty's Government what steps they have taken to ensure that airports in Northern Ireland are treated equivalently to airports in Great Britain in relation to duty-free tax rules for travellers to the EU from 1 January 2020.

Lord Agnew of Oulton : While the EU will also be offering duty-free sales of excise goods for travel to Great Britain, passengers travelling from the EU, including Ireland, will have to pay excise duty on goods they bring into the UK, subject to certain personal

65 For details see, The UK-EU Trade and Cooperation Agreement: summary and

implementation, CBP9106, 30 December 2020. 66 The Northern Ireland Protocol, CP346, December 2020. See also, Joint Committee

decisions on the Northern Ireland Protocol, CBP9102, 23 December 2020. 67 HMRC, Trading and moving goods in and out of Northern Ireland, 31 December

2020 68 SI 2020/1619. See also, HMRC, VAT: the Travellers’ Allowances and Miscellaneous

Provisions (Northern Ireland) (EU Exit) Regulations 2020, 22 December 2020

25 Commons Library Briefing, 18 January 2021

allowances. This means passengers will need to go through customs processes and declare goods they are carrying in their luggage where duty is due.

By contrast, the Government has committed to Northern Ireland continuing to have unfettered access to the rest of the UK, including passengers from Northern Ireland being able to carry unlimited amounts of personal goods into Great Britain without having to declare them.

Offering duty-free sales without charging excise duty on entry to Great Britain would compromise the UK internal market by allowing unlimited duty-free goods to enter the UK, undercutting domestic retailers and eroding the tax base.

However, the alternative would be to charge tax and duty on these goods to put Northern Ireland in the same position as Ireland.

In practice, this would mean treating goods moving from Northern Ireland to Great Britain as though there were an international border for passengers. This goes against the Government’s clear policy that Northern Ireland is, and will remain, an integral part of the UK, including for excise purposes.

HMRC has published guidance providing further information relating to the VAT and excise treatment of goods under the Northern Ireland Protocol, which can be accessed here: https://www.gov.uk/government/publications/accounting-for-vat-on-goods-moving-between-great-britain-and-northern-ireland-from-1-january-2021 and here: https://www.gov.uk/government/publications/moving-excise-goods-as-freight-under-the-northern-ireland-protocol-from-1-january-2021/moving-excise-goods-as-freight-under-the-northern-ireland-protocol-from-1-january-2021#excise-movements-from-great-britain-to-northern-ireland-via-the-eu.69

69 PQ HL11028, 17 December 2020

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3. Annex 1: The pre-1 January 2021 regime for duty- and tax-free goods

This is taken from, HMT/HMRC, A consultation on the potential approach to duty- and tax-free goods arising from the UK’s new relationship with the EU, March 2020 (Annex A)

Passengers arriving from the EU

1. Unlimited personal use allowances for alcohol and tobacco (applies to excise duty only) for passengers going from EU-UK.

2. Minimum indicative levels act as guidelines for what constitutes personal use.

3. The current minimum indicative levels for alcohol, derived from EU law, are:

• 110 litres of beers

• 90 litres of still or sparkling wine

• 20 litres of fortified wine

• 10 litres of spirits

4. The current minimum indicative levels for tobacco, derived from EU law, are:

• 800 cigarettes

• 200 cigarillos

• 200 cigars

• 1 kilogram offhand rolling tobacco (or any pro rata combination of tobacco)

5. VAT is paid in the member state of purchase for goods bought within EU (no UK VAT is paid by consumers – different rules can apply if goods are carried in a commercial context).

6. No customs duty is due on goods bought in the EU and brought back to the UK as within EU customs union.

7. Passengers must use the blue channel to enter the UK.

Passengers arriving from the Rest of World (RoW)

8. Quantitative ‘tax and duty-free’ allowances for VAT and excise duty for goods contained in personal luggage of passengers from RoW to UK and are for personal use (Travellers Allowances Order). Total value £340 or less, if the person travelled by air or sea. Total value £240 or less, if the person did not travel by air or sea.

9. For excise goods customs duty is not due if within the quantitative allowances.

27 Commons Library Briefing, 18 January 2021

10. The current quantitative allowances for alcohol are: o 16 litres of beer

• 4 litres of still wine

• 2 litres of sparkling wine or 2 litres of fortified wine or 1 litre of spirits (or any pro rata combination of these drinks)

11. The current quantitative allowances for tobacco are:

• 200 cigarettes

• 100 cigarillos

• 50 cigars

• 250 grams of hand rolling tobacco (or any pro rata combination of tobacco)

12. If within the allowance, declare using the green channel, but if carrying anything exceeding this amount, the goods must be declared using the red channel.

Tax/Duty-free Shops

13. Referred to as ‘Export Shops’ in excise legislation and ‘airside/tax-free shops’ in VAT legislation.

14. UK export shops are permitted to supply excise goods to passengers without payment of excise duty and are located in ports and airports beyond security and customs controls.

15. The passengers can buy duty-free goods if they have travel transport documents for a voyage or flight to a destination outside of the EU.

Sales on-board ships and aircraft

16. There are differing rules for sales of goods on board ships (including cruise ships) and aircraft.

17. For VAT - goods sold on journeys taking place within the EU must be sold subject to VAT at the rate of the member state of departure.

18. Sales for on-board consumption:

• Excise goods for consumption on any journey to a destination outside the UK may be sold duty-free

19. Sales of excise goods to take-away:

• No customs duty applicable. Customs duty only applies if goods bought on board are then imported into the UK – see above regarding allowances. If the passenger consumes the goods on board, no customs duty is due

• Excise goods sold for take-away on journeys taking place within the EU must be sold excise duty-paid according to the rules of the member state of departure or destination, depending on where in the journey the goods are sold. There are rules for persons who intend to sell excise goods on board ships and aircraft making journeys between the UK and EU including, amongst other things, requiring those who sell

28 Passenger purchases of alcohol and tobacco

excise goods on board ships and aircraft to be registered “mobile operators”

• Excise goods sold on-board ships and aircraft on journeys from the UK to a country outside the EU for take-away are considered export shops and the same rules apply – goods may be sold duty-free to passengers travelling to a destination outside the EU

Cruise ships

20. There are three classification of cruises:

• Intra-UK – these cruises do not call at any port other than those within the UK. As such they may only carry as stores or offer for sale UK duty-paid excise goods, such as alcohol and tobacco

• Intra-EU – these cruises call at ports within the EU. Stores may be loaded for consumption on board from bars and restaurants which may be duty-free. Any goods purchased from shops to take-away must have tax and excise duty applied

• Non-EU – these cruises must make at least one call to a non-EU country port

21. Existing rules mean that cruise ships that call exclusively at EU countries may not sell duty free on-board for take-away.

22. If a cruise ship makes a stop at a non-EU country, it may sell duty-free from its shop on-board for the duration of the cruise.

29 Commons Library Briefing, 18 January 2021

4. Annex 2 : Technical note on the withdrawal of the VAT RES and the airside ESC

This is taken from, Treasury Committee, Letter from the Exchequer Secretary to the Treasury relating to the VAT Retail Export Scheme and tax-free airside sales, 6 November 2020

HM Treasury, Technical note on the withdrawal of the VAT Retail Export Scheme and tax-free airside sales, 12 October 2020

Introduction

HM Treasury and HMRC’s consultation on duty-free and tax-free goods arising from the UK’s new relationship with the EU ran from 11 March to 20 May 2020. 73 formal responses were received and officials held 12 individual and roundtable meetings with many of the businesses and industry bodies who responded during the consultation period. Again, the Government would like to thank stakeholders for engaging in this consultation during a challenging period.

The consultation response, published on 11 September, sets out in detail the rationale for the decision to withdraw the VAT Retail Export Scheme (VAT RES) and tax-free airside sales. As we have received a large amount of correspondence following the announcement, we have formulated this technical note to expand on this document and to respond to issues raised by stakeholders.

HM Treasury, HMRC officials and the Exchequer Secretary to the Treasury have also met with industry bodies to discuss the rationale for these changes and, where appropriate, these meetings will continue in the coming weeks. The Government continues to invite further views and ideas which help meet the Government’s objectives in this area but is clear these changes will apply from 1 January 2021.

The VAT Retail Export Scheme

The consultation explored a broad number of options for the VAT RES, including the potential withdrawal of the scheme. It also discussed the Government’s concerns with the operation of the scheme. In particular, paragraph:

• 4.21 references the possibility of abolition of VAT RES.

• 4.23 then contains an open question on the impacts of abolition.

The Government did not have the choice of maintaining the VAT RES as it is today. The choice was between extending the VAT RES to EU residents or removing it completely as World Trade Organisation (WTO) rules specify that goods bound for different destinations must be treated the same.

International tourism and the high street

Many industry stakeholders have raised concerns that the withdrawal of the VAT RES will damage both the UK high street and international tourism. The

30 Passenger purchases of alcohol and tobacco

Government recognises the contribution that the VAT RES has made to international tourism and retail in the UK, which was acknowledged in the original consultation document. However, the scheme is very costly. In 2019, HMRC estimate VAT RES refunds cost around £0.5bn for around 1.2m non-EU visitors at UK exit points. In 2019 the ONS estimate there were substantially more EU visitors (24.8 million) than non-EU passengers (16.0 million) to the UK.70 This implies an extension to the EU could significantly increase the cost of the scheme by up to an estimated £0.9bn. This would result in a large amount of deadweight loss by subsidising spending from EU visitors which already happens without a refund mechanism in place, potentially taking the total cost up to around £1.4bn per annum.

Regarding the impact on the high street, the removal of the scheme will clearly change the implicit price for some goods currently purchased by non-EU visitors who take these items home in their luggage – although these visitors will still be able to purchase items VAT-free if retailers ship them direct to visitors’ overseas addresses. This ‘shop and ship’ arrangement will also be available to EU residents from 1 January 2021. At the margin, this may of course affect demand for these goods and could impact incentives for a small proportion of non-EU residents to visit the UK. However, based on ONS passenger estimates and the 1.2m visitors who used the VAT RES in 2019, HMRC estimate that fewer than one in ten non-EU visitors use the VAT RES. VAT refunds are also less likely to be a significant pull factor for lower value purchases, and for higher value purchases passengers will be much more likely to be liable to pay the relevant import taxes in their destination country if the goods breach personal allowance limits.

Stakeholders have also told us that they expect these changes will lead to job losses. The Government recognises the challenge all businesses face and is spending billions of pounds supporting people, families and the economy during the COVID-19 pandemic. The Chancellor announced the Winter Economy Plan on 24 September. This includes an extension to the temporary 5 per cent reduced rate of VAT on goods and services supplied by the tourism and hospitality sectors from 12 January to 31 March 2021. This alone provides continued support for the cash flow and viability of over 150,000 businesses and protection for 2.4 million jobs in the tourism and hospitality sectors. This is in addition to the 100% business rates holiday for many businesses, which is worth over £10bn, and a £1,000 jobs retention bonus for bringing furloughed employees back to work. The Winter Plan also provides further support to businesses and jobs over the coming months, not least through the Job Support Scheme which will protect millions of jobs.

International comparisons

The VAT RES is a requirement of EU law so all Member States have to operate an equivalent VAT RES. It is also the case that many non-EU countries have an equivalent scheme. However, there are notable exceptions, including New Zealand and Canada (who use a Goods and Services Tax) and the USA (who do not have a country wide system). These countries remain popular tourist destinations without this type of tax-free shopping available to overseas visitors.

70https://www.ons.gov.uk/peoplepopulationandcommunity/leisureandtourism/bulletins/overseastrav

elandtourism/previousReleases

31 Commons Library Briefing, 18 January 2021

Evidence and analysis

The Government considered the views and evidence submitted by stakeholders as part of the consultation, in addition to the effect of these changes on the Exchequer, economy, retailers and passengers, alongside other Government objectives and priorities. The independent Office for Budget Responsibility (OBR) will also set out their assessment of the fiscal impact at the next forecast, which the Chancellor has asked them to prepare for in November. As part of this, HMRC will make behavioural assumptions which they believe to be central to these changes, which the OBR sign off, and these will be incorporated into the OBR’s assessment of the fiscal effects. They will also be looking at this package in the round – including the effects of extending duty-free sales – alongside the substantial support provided to the economy and retail industry.

Tax-free airside sales

In terms of tax-free airside sales, the consultation did state that the Government was initially minded to extend tax-free sales to EU passengers. We therefore appreciate the final decision will have come as a disappointment. However, the consultation document also discussed the Government’s concerns with the operation of the scheme and asked about the impacts of abolishing airside tax-free sales. In particular, paragraph:

• 4.26 asks an open question about whether the Government should extend airside tax-free sales.

• 4.27 question asks specifically about views and impacts of abolishing airside tax-free sales.

International tourism and the aviation sector

Tax-free airside sales are not a requirement of EU law and EU Member States have varying policies regarding tax reliefs in airports. In the UK, the current rules that allow tax-free airside sales are not set out formally in legislation and have historically been permitted through an extra statutory concession (ESC). Following a 2005 Judgement from the House of Lords, which limited HMRC’s discretion to provide tax reliefs through an ESC, the legal scope for any ESC has been very limited. As such, the ESC for tax-free airside sales, as it stands, could not be amended. The ESC, as drafted, should only apply to non-EU bound passengers and cannot be amended to apply to EU bound passengers. Therefore, under WTO rules, whereby all passengers must be treated equally, the ESC cannot apply from the 1 January 2021.

The consultation asked whether the Government should implement new legislation to permanently allow this relief and extend it to the EU. In a similar vein to the VAT RES, the choice was between removing the ESC and instead legislating to enable airside tax-free sales to non-EU and EU-bound passengers or removing it completely as a result of WTO rules. HMRC estimate that around £150m of VAT is not charged as a result of tax-free airside sales. As with the VAT RES, extending the relief to the EU would significantly increase the cost of the scheme and result in a large amount of deadweight loss by subsidising spending from EU-bound passengers which already happens.

The withdrawal of tax-free airside sales follows significant consultation with industry and the Government considered the views and evidence submitted by stakeholders as part of the consultation in making the decision to not pursue

32 Passenger purchases of alcohol and tobacco

this legislation. The Government also raised concerns that the benefit is not always passed on to consumers and while the Government acknowledges the steps industry has taken since the ESC received media coverage in 2015, in some instances the Government’s concern remains. The concession is also not consistent with international tax norms, for example, where snacks and drinks are consumed in the airport or goods are brought back into the country by UK residents with tax unaccounted for.

Stakeholders have told us that withdrawing the ESC that permits tax-free airside sales will damage UK airports, and that this currently forms part of airport operators and retailers revenue and financing. The Government recognises the challenges the aviation sector is facing as it recovers from the impacts of COVID-19 and has supported the sector throughout the pandemic, and continues to do so, including schemes to raise capital, flexibilities with tax bills, and financial support for employees (including the recently announced Job Support Scheme). The Government has also extended the temporary 5 per cent reduced rate of VAT on goods and services supplied by the tourism and hospitality sectors from 12 January to 31 March 2021, which will support the hospitality and tourism sectors.

Regional airports and International rail

At the same time as removing this concession from 1 January 2021, the Government has decided to extend duty-free sales to EU-bound passengers for the first time in over 20 years. This will be a significant boost to all airports and international rail terminals in England, Scotland and Wales, including smaller regional airports and rail hubs which have not been able to offer duty-free to the EU before. According to data from the Civil Aviation Authority,71 in 2019, 24 out of 29 airports in the UK had significantly more flights to the EU than non-EU destinations, with intra-EU travel clearly making up the majority of passenger travel from the UK.

Some stakeholders have also raised concerns that international rail terminals in GB will lose out from the removal of tax-free sales, as they expect retailers in EU train stations to offer duty-free and tax-free sales to passengers travelling to GB. However, EU law does not currently allow duty-free sales in international rail terminals and the Government is not aware of any announcements from the EU in this area. As mentioned above, ‘airside’ tax reliefs (which could theoretically be available at other exit points) are not a requirement of EU law, with varying policies found throughout the EU.

71 https://www.caa.co.uk/Data-and-analysis/UK-aviation-market/Airports/Datasets/UK-Airport-

data/Airport-data-2019/

BRIEFING PAPER Number 1223 18 January 2021

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