Who Is Right In the UK’s Battle On Airport Retailers?

On Tuesday I wrote about the interesting situation going on with airport shops in the UK, which is outraging consumers.

UK retailers pocketing VAT on duty free purchases

To briefly summarize, basically UK airport retailers request your boarding pass when you purchase something, whether it’s a pack of gum or an expensive bottle of champagne. The prices include VAT (value added tax), and they charge it to you regardless of whether you’re traveling within the UK/EU or not. If you’re traveling within the UK/EU, that VAT has to be paid to the government. If you’re traveling outside the UK/EU, the retailers are pocketing the 20% VAT.

To contrast that to the US system, here we have duty free shops which show prices without tax. If you are in fact traveling internationally (and can prove it by showing your boarding pass), you’ll receive the tax free pricing. However, you can still buy something from the shop if traveling domestically, but tax will be added to the purchase price.

To many this felt like UK retailers “stealing” from consumers in a sneaky way, and caused outrage.

Heathrow-Duty-Free

What has the response been?

Well, the story that broke earlier this week seems to have gone somewhat viral, and that has resulted in a few things.

First of all, some are calling on the UK government to make a law requiring shops to pass on the tax savings to consumers. Via The Telegraph:

Shops should be forced by law to reduce their prices in airports, the retail watchdog has said, as it urged ministers to pass new legislation to end the VAT rip-off.

“We don’t have any powers to make retailers adhere because [passing on the VAT relief] is not law,” the head of the dispute arbiter told BBC Radio 4.

“The Government needs to make this a law [and] say to the retailers in airports you must, not we want you to, you must pass on this relief and you must make it very clear to your shoppers what it is they are getting for their money.”

Furthermore, as mentioned above, passengers are under no obligation to show their boarding passes when making purchases. Of course retailers want to see the boarding passes since there’s a chance they can pocket 20% on purchases. But it seems not all retailers are adhering to that rule:

On Wednesday, however, reporters from this newspaper found many shops at Heathrow were declining customers who refused to show their boarding cards.

Shop staff in Boots said as many as half of customers were refusing to give their flight details. In defiance, one person waved above their head the pages of a newspaper displaying the story.

The Telegraph also found evidence that customers who complained were wrongly told it was a “requirement” under airport rules for all shops to check boarding cards.

In the text of an email, seen by this newspaper, a Dixons Travel representative wrote: “I can confirm that the requirement to check the boarding pass at all our airport stores is in compliance with the BAA rules and this is not our own policy.”

When challenged, a spokesman for the company said: “We can confirm that this is not our policy and this advice was incorrect.”

There seems to be a lot of misinformation out there. If the retailers want to defend this practice then they at least have to follow the correct rules rather than making up their own, or they’ll really be in trouble.

Why retailers aren’t wrong (other than how they’re going about it)

It’s easy to think of this as the greedy retailers “stealing” 20% of the money of travelers. But I don’t think that’s the case.

The reality is that operating retail shops at airports is expensive. Rent is higher and staff are often paid more. Yet in many cases airport retailers have the same prices as outside the airport. Margins in retail can sometimes be quite small, so there’s a good chance that a large percentage of profits for airport retailers actually come from the VAT refunds they pocket.

Let’s be practical here. Some are suggesting airport retailers should be forced to “reduce” their prices since they’re pocketing the 20% VAT for many travelers. That’s not happening.

What are the possible solutions?

  • Airport retailers could raise prices across the board and then issue the 20% refund to those traveling outside the UK/EU
  • In terms of logistics, retailers could list the UK/EU traveler price and then the non-UK/EU traveler price; this would likely complicate things, increase wait times, and increase staffing requirements, all of which could further raise prices
  • Airport retailers could maintain the status quo, perhaps with a bit more transparency about the system, or at least posted signs about why passengers are being asked for their boarding passes

I do take issue with the lack of transparency involved, and in particular with the misinformation from retail associates claiming that showing a boarding pass is a requirement, which isn’t the case. Consumers reasonably assume that when they’re asked for their boarding pass past security there’s a reason for it, other than a retailer trying to pocket cash from them.

But this battle isn’t as simple as airport retailers meeting their profitability goals and then just pocketing an extra 20% on many travelers. That 20% is probably an integral part of retailers’ bottom line.

I’ll be curious to see what happens with this. It doesn’t impact me one way or another, since I don’t remember the last time I’ve bought anything at an airport in the UK. That being said, I think consumers should be careful what they wish for, because if retailers lose a lot of their VAT refunds, it will likely result in price increases.

What do you think is the solution to the UK airport VAT/boarding pass fiasco?

(Tip of the hat to Mike)

Comments

  1. Based on Economic theory, reduction of tax will boost demand, then increase price( law of demand)

    Therefore it is impossible for tourist get back all 20% tax back

  2. I dont believe anyone can say with a straight face that its fine for a business to cheat you out of paying a sales tax when you are not legally obligated to pay and call it our business model.

    When I fly from the UK internationally and by virtue of the law dont have to pay a UK sales tax, I dont want to still pay full price and allow the retailer to claim back 20% profit.

    @Lucky when the shops are called TAX + DUTY FREE SHOP, its literally in the name. Business model excuses for logistical challenges are cop outs.

  3. Completely disagree. The VAT is being paid for by the purchaser for the “value added” by the store. If the purchaser by law is deemed not required to pay VAT, then they should pay the pre-VAT price. Its not as if the store is charging the store’s purchase cost+VAT to the consumer, but rather the product is already marked up from the store’s purchase cost and then VAT is applied. So the store is just grabbing extra money for money’s sake.

    @Him – You are forgetting the supply side. If price goes down, demand goes up. But if cost of the supply stays the same/unit (which it would actually become lower b/c the fixed costs would be spread over more sales), then the seller is keeping their revenue artificially low by not meeting demand.

  4. See, I would challenge the notion that it’s impractical for shops to post a VAT-inclusive price for UK/EU travelers, and VAT-free pricing for those exempt. UK VAT laws (oddly enough) charge VAT on hot prepared foods for take-out, but not cold ones. However, all food eaten on-premises is charged VAT. My point is that last time I was in the UK, sandwich shops displayed two prices for various food items. One was labeled “eat in,” the other “take away,” and the difference between the two was the VAT. It really didn’t seem that complicated.

  5. What these retailers are doing is stealing. Why charge a customer for VAT when the item is not eligible for it? Frankly, Lucky, I’m surprised to see your defense of it. To suggest that it is difficult to charge 20% less for an item is ridiculous.

  6. “The reality is that operating retail shops at airports is expensive. Rent is higher and staff are often paid more. Yet in many cases airport retailers have the same prices as outside the airport. Margins in retail can sometimes be quite small, so there’s a good chance that a large percentage of profits for airport retailers actually come from the VAT refunds they pocket.”

    Oh come on now, the markup on airport prices vs. outside is almost universally astonishing. There are retailers that buck this trend but they’re very much in the minority.

  7. VAT is a tax that goes to the government. When a shop doesn’t pay that tax to the government they are making an EXTRA 20% profit on top of the profit they have built into the price of the item.

  8. What’s often not discussed in this situation is the change in the airports business models caused by the low cost carriers in Europe. These airlines negotiate low (or no) landing fees with the airline on the grounds they will bring a lot of passengers through the airport.

    Therefore fees from the airport retailers paid to the airport are how most airports make their money now, you just need to look at the published accounts to see this.

    Therefore if you force the retailers to cut prices, or remove the benefit of reclaiming VAT, retailers will renegotiate these contracts to maintain their margin and airports retail revenue will drop and they will have to increase landing fees…bye bye cheap flights.

    You are going to pay one way or the other at least spending money in a shop is optional.

    As for whether it’s ethical or not, the shop displays a price and the consumer pays it if they are happy with the price and doesn’t if they don’t. The make up of the price is irrelevant to that equation.

  9. They could just show the price without tax and with tax. As you said, America does that and it won’t really increase wait times.
    The suggestions you mentioned are basically copied from the article – nothing original

  10. @Dave “Oh come on now, the markup on airport prices vs. outside is almost universally astonishing. There are retailers that buck this trend but they’re very much in the minority.”

    I’ve seen several articles and reports on this in several UK media outlets, and the price differentials on most of the items they used in their reports were much smaller than is the norm in the some other countries, particularly the US. For example, Sky News found many products at a Boots location in an airport (not sure if it was LHR or LGW) where the price was identical to a nearby high street store.

    @Matt S “What these retailers are doing is stealing. Why charge a customer for VAT when the item is not eligible for it? Frankly, Lucky, I’m surprised to see your defense of it. To suggest that it is difficult to charge 20% less for an item is ridiculous.”

    Setting aside the difficulty (or lack thereof) of the mechanics of charging two different prices, Lucky’s underlying point stands: that right now, retailers are presuming that their VAT bill will be reduced by being able to not remit VAT collected on some portion of their sales. If they had to give all this money back to the specific customers whose purchases qualified for this treatment, they’d either (a) have to accept a lower profit margin, (b) raise prices for everyone to cover it, or (c) not carry items which, net of the VAT-reduction cash, didn’t contribute enough to profit.

    Part of the problem here is the lack of transparency around VAT. From a narrow legal/accounting perspective, a consumer doesn’t pay VAT, but rather VAT is paid by the seller based on the difference between sales and costs, and merchants are allowed to take a credit on their VAT expense for export sales. It sounds like splitting hairs, but it’s an important distinction in that the tax money never “belongs” to the consumer, unlike retail sales taxes in other systems, so it isn’t “stealing”.

    (By way of comparison, in the US, in many {but not all} states, the sales tax is legally defined as falling on the purchaser, not the seller. The seller merely acts as an “agent of the state” in collecting the tax from the purchaser, holding the money in trust for the government just as they do taxes withheld from their employees’ paychecks. So any diversion of that money would be “stealing”, but from the government, not the customer. The lack of transparency in a VAT system is one of the reasons even more liberal US and Canadian politicians have shied away from proposing a VAT.)

  11. I’m astonished that there are STILL people claiming a system that doesn’t tell you what you have to pay until after you’ve checked out (I.e. America) is clear and transparent compared to a system where you pay EXACTLY what is written on the price tag.

  12. This is not a difficult problem to resolve.

    Already purchases or alcohol and tobacco have an EU.Ex-EU price, how hard it is to apply the same logic for other product? Scan the boarding bass to verify the passenger destination, sales agent manually verifies the ID, and you can charge a tax free price.

    The retailer cost of location is nothing different than they’d face anywhere else. For a location with a high footfall, the rents will be higher, but offset through greater sale.

  13. The price being advertised is almost always £x including VAT where legally due. As such, they are effectively advertising that the price is the same for everyone but EU passengers have a VAT component included. It allows them to offer fixed pricing to all passengers while ensuring an adequate margin to cover their costs.

    Other companies do this too. For example, Uber in Australia has some drivers who are registered for GST (the equivalent of VAT) and some who aren’t. So their prices are advertised as “inclusive of GST where payable” but are the same total irrespective of the incidence of GST.

  14. I originally wrote about this on my http://www.bugadvisor.com blog back in November last year although my focus was on the inconvenience of having to retrieve and show a boarding pass when buying a sandwich.
    At the time I wrote to Boots and asked them to confirm that I could decline to show my boarding pass – they replied that I was within my rights not to show the pass and I’ve been refusing every week when I fly since that date. There was one time when a lady at Boots LHR T3 was a bit funny with me, but apart from that all the staff were okay. If you’d like to read the Boots letter in full then it is here http://wp.me/p2BxLS-hZ

  15. Ben you say “In terms of logistics, retailers could list the UK/EU traveler price and then the non-UK/EU traveler price; this would likely complicate things, increase wait times, and increase staffing requirements, all of which could further raise prices”

    This is precisely how it used to be done with very simple, clear, colour coded price tags on the shelf. It didn’t complicate anything for anyone, wait times at tills are no different now, staffing requirements I doubt would be any different either – how so? Because the scanned boarding card would indicate which price you were entitled to!

  16. Not really, as you’d have a continuous stream of people arguing about how deceptive it is because they thought they’d get the cheaper price.

    All this shows is how ridiculous and petty the UK public is. I’m incredibly glad I no longer have to work in retail.

  17. How is this not fraud? If the money is collected under the assumption that it’s tax, then it should be paid as tax.

    If the retailer were to add a 5% surcharge which was to be donated to a charity, but not actually donate anything, would that not be illegal?

    The argument that they already have high operating costs, or higher overheads for being at an airport premises is rubbish. No one forced their hand into opening a business at the airport, and they should have known their operating costs going into the deal and be ensuring sufficient margins to allow them to trade and make a profit without resorting to scamming customers.

    Also worth noting that for the higher end retails stores – like your Gucci & Prada etc, most of their “standard” retail stores are located in premium locations. Thus they would already be budgeting significantly higher operating costs – so you would expect the difference in operating costs compared to an airport to be minimal.

    Lastly i don’t think it’s unjustified for an business located at the airport to charge a premium over what they may charge at other locations. You pay for convenience and location with everything you buy. The only issue is when that premium becomes almost extortion IE a bottle of water past security being double the cost of the same bottle prior to security etc..

  18. @Troy Its not fraud because no one is being deceived. A price is being offered and accepted by the customer. How that price is made up is irrelevant to the transaction.

    It’s no different to making a purchase on the assumption that the company will pay corporation tax on the amount and then the company finding a way to minimise the tax paid.

    What we should all be more up in arms about are all the companies that collect VAT, PAYE, APD etc and then use the money for other expenses and then go bust owing the treasury millions in VAT. Those companies are the real fraudsters.

Leave a Reply

Your email address will not be published. Required fields are marked *