20 August 2015
Duty Free Sales- a nasty piece of bullying
By John Watson
Nature provides us with warning signs. A red sky in the morning is a sign of rough weather. A horse with its ears laid back is likely to kick. If the politicians agree on something it is probably wrong. It is the last of these rules which tells us that we should look carefully at the current row over VAT and duty free shops where there is unanimity of sentiment between David Gauke (Financial Secretary to the Treasury) and Chris Bryant (the Shadow Minister for Culture, Media and Sport). Add in the fact that the Times agrees with them too, and the hairs on the back of the neck should be beginning to prickle.
At the heart of the issue is the fact that duty-free shops at airports (that is, all the shops once you have gone through passport control) do not have to pay VAT on sales to long-haul passengers. It follows that if they sell at the same price to a long haul passenger and a passenger whose destination is in the EU, they will pay VAT on the second sale but not on the first. That isn’t some wicked form of tax avoidance but merely the way in which the VAT system works. So far everyone agrees, presumably including the Conservatives, Labour and the Times, who together with their supporters I will refer to as “CLT” (at the risk of their being confused with sandwiches, I suppose).
The first contentious question is pricing. By keeping the price the same for EU and long haul customers, the shops make a higher profit on sales to the latter. CLT believe that they should give the latter a discount so that the profits even out. It is not obvious why. Where VAT is charged on a sale to an individual who is not carrying on a business, it is simply an overhead of the retailer making the sale – just like corporation tax, rent, staff costs, etc. Like other overheads, it will be taken into account in deciding whether the shop is likely to be profitable, and at that stage assumptions must be made as to the proportion of sales on which VAT is not chargeable. There is no reason why sales to long haul customers should be priced differently unless that is commercially desirable in order to increase those sales. Whether that is the case is a matter for the shop.
The complaints of CLT and their friends do not however end there. In order to establish the proportion of sales made to long haul customers, the shop needs to see boarding passes. It is for that reason that your boarding pass is asked for when you buy things in the duty-free zone, and some shops there will not sell you any goods unless you produce it. Again, you would think that this is a commercial matter for the shops, but that does not seem to the view of CLT. They think that people are being misled into thinking that the showing of boarding passes relates to security – presumably on the basis that a teddy bear with a tartan scarf destined for South America might be a threat to the plane.
Actually, it’s very unlikely that anyone really does think that. Most of us will have regarded it as just a bit of admin which has to be gone through – rather like proof of identity for the money laundering regulations. Anyway, if the shops decide to impose this on the customers it is surely up to them.
Of course, rational argument doesn’t matter at this stage. The pack is in full cry now. Sweeping down from Hampstead and Highgate they come, newspapers at the ready, prepared to withhold their boarding passes or die heroically in the attempt. Who will dare to stand against them? Not the retailers, for sure. Wise companies give in to political bully boys whatever the merits. Who then? You? Me?
I expect differential pricing will come in in the end, but until it does, remember one thing before you force your political principles down the throat of some poor check-out assistant and make a fuss about not showing the boarding pass you hold in your hand. Buying things is a transaction where one person is willing to buy and another to sell at the same price and a good deal is one where both sides are happy with the result. There is little room in this relationship for gratuitously damaging the other side, even by denying them the ability to account for their tax correctly.
Still, I would not want to be unkind to the CLTs. They probably feel that urging someone else to give discounts is a serious contribution to the political debate and, to be fair, by their standards it probably is.
