Britain’s exit from the European Union was used as a trigger for two key changes to the way VAT is charged in this country. In both cases, the government thought it could increase its tax take without any unintended consequences.
First up, the UK abandoned the EU’s Margin Scheme, which allows any pre-owned watch dealer based within the EU to charge VAT on just the profit margin of a trade.
Under the Margin Scheme, if a dealer bought a pre-owned Rolex Submariner for £10,000 and sold it for £15,000, VAT would only be applied to the profit of £5,000, — a £1,000 tax bill.
Since January 1, 2021, rules in the UK changed. Without the Margin Scheme, the same watch selling in the UK for £15,000 would now have £3,000 of VAT added, 20% of the total price.
With all member states of the EU still offer the Margin Scheme, it means a customer buying the aforementioned Rolex from any trader based in the EU will pay £16,000 for the watch, but a UK-based business selling to an EU-based customer would have to charge £18,000.
According to vintage watch expert Justin Koullapis, director of Watch Club, who WatchPro spoke to in early 2021, sales to Europe “dropped to zero” when the post-Brexit trade deal passed into law.
Eddie Bloom, director at London-based Bloombar Watches, agreed, adding that it is not just consumer purchases suffering, but also business to business deals.
“The issue not only lies with us UK dealers not being able to sell to the EU anymore, but also the vast amount of EU buyers who don’t realise that the rules have changed, and continue to buy watches from us on a daily basis, only to cancel the order when they find out that import VAT would be due,” Mr Bloom describes.
There was nothing about Brexit that required the UK government to commit this act of self-harm. It presumably saw it as a way of raising revenue but all it actually achieved was to isolate the UK, making it almost impossible to trade the most expensive pre-owned watches with Europe.
That may not have mattered so much when the pre-owned watch market was on fire because British dealers simply flipped watches between themselves at ever-rising prices. But it has certainly mattered over the past two years when prices have been falling and margins have been squeezed.
Time to end the Tourist Tax
VAT rebates for wealthy tourists shopping in Britain must have looked like a tempting target for a tax raid that could be pushed through under the cover of the wider Brexit agreement.
Again, the Treasury doubtless thought this was a loophole or perk for super-rich foreigners that could be closed without unintended consequences.
Wrong again. Paris is as easy to reach as London for somebody living in Birmingham or Manchester so, when considering a high value purchase, there is a simple equation on where to shop.
Parisian promotional site, Paris Je T’Aime even advertises where to shop and how to reclaim VAT.
Buy a £10,000 watch in Paris and a British shopper can reclaim the VAT at the airport or Channel crossing terminal, saving £2,000. Legally, duty should be charged on the watch — this is what the red lane is for at UK airports.
I would not advocate breaking the law, but who among us would not simply slip the watch onto our wrist and stroll through the green lane?
This loss of domestic business is on top of the hit on sales to overseas visitors, which have now worked out that shopping for luxury goods in the UK is 20% more expensive than on the Continent.
Parts of the luxury business can cope with this better than others. The VAT hit is, of course, different if we are talking about a £3,000 watch or one costing £10,000. British residents shopping in Britain probably wouldn’t go abroad for a few hundred quid saved, but the higher the price, the greater the temptation.
In the fourth year since the Brexit agreement introduced this Tourist Tax, an even more worrying trend is emerging: the market for the most expensive watches, let’s say £50,000 and upwards, is being strangled as the maths dawns on people.
This may not apply, for now, to brands like Rolex, Patek Philippe, Audemars Piguet and Richard Mille, because you cannot simply walk in as a stranger to an authorised dealer in Paris and walk out with a watch.
But it does apply to other purveyors of the priciest pieces like Jaeger-LeCoultre, Hublot and Chopard; and particularly to a new breed of independent watchmakers who will happily meet a valued client on one side of the English channel so that the VAT can be reclaimed.
Agents for super-rare, six-figure, watches often avoid having product to sell in this country. Instead, they find customers for a watch and then introduce them to the watchmaker to close a deal in return for a commission.
If this is raising more money for the Treasury, I fail to see how.
You can see this phenomenon in figures from GfK, which show how sales have cooled for watches sold for over £10,000.
I expect this trend to worsen this year as global citizens become more knowledgeable about where in the world to shop for high end pieces (Japan is a current favourite because the value of the Yen is down).
If Britain remains uncompetitive on price, we will see retailers taking a more conservative on buying, which will mean this country becoming less of a destination for buying rare watches.
A classic vicious circle.
It does not have to remain this way, but it probably will. As I suggested ahead of the Spring Budget, it is hard to see how a tax change that some will portray as a hand out to wealthy foreigners can be pushed through in an election year.
And it is hard to imagine a Labour government expending any political capital on such a change, regardless of the mounting evidence showing the damage being done by dropping VAT rebates and the Margin Scheme.
We need the Tourist Tax dropped and the Margin Scheme restored in this country, and the luxury industry will need to be relentless in its pursuit of this objective, which in my view is unquestionably good for Britain.
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