An exposé by The Independent newspaper in August revealed that some airport retailers had been pocketing cash from VAT discounts without passing on the savings to airport customers.
The investigation revealed that passengers were being asked to show their boarding passes when buying items so retailers could identify who was flying to non-EU countries and avoid paying 20% VAT on those purchases. And it's precisely those passengers who are travelling outside the EU who are entitled to VAT savings; those within the EU or the UK have to pay existing rates of VAT.
Explaining the situation, The Independent's travel editor, Simon Calder, told the BBC: "If you take a £6 bottle of sun cream, the VAT element is £1. So if you fly to Greece, the retailer pays that to the government, if you fly to Turkey and the retailer can find out, then it goes straight into their pockets." It must be remembered, though, that not all have engaged in this activity.
It all means, says Tamara Habberley, a VAT consultant with The VAT People, that "when you go into airport stores, which are basically clones of high street stores, but are in the VAT and duty-free area of the airport, you are paying the same prices as you would on the high street".
Angry and disappointed: Passengers respond to the VAT scandal
In theory, the VAT exemption on goods exiting the EU should mean reduced costs, but of course that is only realised if retailers do actually lower their prices. "VAT relief at airports is intended to cut prices for travellers – not be a windfall gain for shops," warned Chancellor George Osborne in December.
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This type of response emerged from all corners: passengers, journalists, politicians and consumer rights experts. There was even talk of a grassroots rebellion of passengers refusing to show their boarding passes.
Plenty of newspaper columnists had their say. One article, written by Leo McKinstry, referred to it as the "boarding-pass pantomime" that only served to "blight" the airport experience, encapsulating the feelings of many.
Financial Secretary to the Treasury David Gauke told the Independent of his disappointment at the revelations, while the Retail Ombudsman argued for government to be stronger and harder: "They need to say to the retailers in airports 'you must', not 'we want you to'," Dean Dunham told BBC Radio 4.
For the industry, some of those implicated – such as Boots and WHSmith – have outlined that asking for boarding passes is a practice to ensure that VAT accounting is accurate and in line with HM Revenue and Customs' (HMRC) requirements. They also added that passengers have been asked, not forced, to hand them over. The UK Travel Retail Forum (UKTRF) has also defended its members, seeking improved industry-led communication around transparency. So, when all is said and done, what are the rules?
No obligation to show boarding pass
First, it's important to note that this issue is about VAT, not excise duty. When shopping in a tax-free shop, such as a Boots, passengers do not have to show a boarding pass. However, it does need to be shown in duty-free shops when buying alcohol, cigarettes or tobacco, as well as other products.
HMRC states: "Sales in duty-free shops are tightly controlled as they can hold goods where the duty or VAT has been suspended. To ensure sufficient controls are in place, HMRC require duty-free outlets to provide evidence of destination for all goods sold." So, that boarding pass is the evidence.
But, there's no such requirement when it comes to VAT and tax-free shops. "The rules are relatively simple," says Habberley, "in that if a business is selling goods such as newspapers, books and cold takeaway food, they don't have VAT on them. So, whether you're buying them outside of the airport or within the airport, they will always be zero-rated."
However, for items that are standard-rated at 20% – think soft drinks, sweets, snacks, crisps, cosmetics and sun cream – if the retailer can prove the goods have been taken outside the EU, they can then zero rate it. "To be fair to the retailers, this is why they've been collecting information from things like boarding passes, because they need that evidence to show the goods have been exported outside the EU," adds Habberley.
Although even with that evidence some retailers have not passed on the savings. There's nothing illegal about this process, however.
VAT review: getting to the bottom of the problem
Nevertheless, the ill feeling and rebellion that this has generated forced George Osborne to launch a review into the system of VAT relief. Starting its work in early January, the Chancellor said it would "make sure that this VAT relief benefits those it's intended for – consumers". The government suggested a publication date of early this year, but when contacted a Treasury spokesperson simply said it will be released in due course.
Retail organisations have been given their chance to state their case and HMRC is now sifting through all of that information, alongside the Treasury and the Department for Business, Innovation & Skills. The UKTRF has also been working with the government throughout the review, says Sarah Branquinho, UKTRF president.
"We understand the review is now in its final stages and we are confident that the government is satisfied with what they have found," she says.
Branquinho adds that the UKTRF's focus is now on improving communication around transparency, saying: "I am hopeful that something will be in place before the start of the summer season." Boots has announced a review of its pricing policy and there's no doubt the public outcry has stung retailers' confidence.
One idea that could restore trust is dual pricing, offering those travelling inside the EU and outside EU different prices. Some duty-free shops already use such a method. It's fair to say it has admirers and detractors. Some suggest it would be too difficult and prefer one price for all, across the board; others believe it's entirely feasible.
"This is extremely common in the catering sector," says Habberley. "If you think about cafes – and not just in airport terminals or the big corporations – they usually have to have a till and pricing system that allows them to differentiate between standard-rated, eat-in hot food, and zero-rated, cold takeaway food."
Habberley adds she sees no excuse for the big corporations not to have a similar structure. This point is backed by an IT director at a high street chain, who spoke to The Independent last year but wished to remain anonymous: "To say it's impossible to implement dual pricing is simply untrue." There's definitely a whiff of caginess to this idea within the airport retail industry, however.
The situation will become clearer once the government review is out in the public domain, but the message from passengers is loud and unforgiving. "At the end of the day, if organisations want to use VAT-free as a selling tool, they should be doing what it says on the tin – passing the benefit to the end consumer," says Habberley.