London is an important point of sale for luxury watches. Extremely important. A lot of the business conducted is done on a tax-free basis; buyers purchase a new watch, claim the 20 percent VAT back and stay stum about their new watch when re-entering their home country – avoiding additional tax. In other words, watch smuggling. I say “was” because . . .
VAT refunds for overseas visitors in British shops will be removed. Overseas visitors will still be able to buy items VAT-free in store and have them sent direct to their overseas addresses, while the costly system of claiming VAT refunds on items they take home in their luggage will be ended.
That’s the 411 from gov.uk. While the new policy eliminates a lot of time and paperwork for sellers, border agents and customers alike – click here for the previous rigmorole – it also eliminates highly lucrative large scale watch smuggling.
Foreign visitors can no longer casually walk their new tax-free watch through customs or pack it discreetly in their luggage, avoiding their home country’s import tax.
This is a huge problem for UK watch sellers.
Pre-Coronageddon, hordes of Chinese “tourists” (a.k.a., smugglers) flew into The Land of Hope and Glory (and other foreign shopping destinations) to buy expensive watches and other luxury goods for customers in The People’s Republic of China. They’d smuggle them back, generating gigantic discounts for their sponsors.
Chinese customers “saved” enough money to pay for smugglers’ airfare, accomodation, meals and profit margin – and still come out way ahead. Here’s why (via journal.hautehorlogerie.org]:
According to the current “Table of Tax Rates on Personal Luggage of Passengers and Personal Postal Parcels Arriving in China”, the tax rate on high-end wristwatches, timepieces and their parts and accessories (with a price estimated by customs at more than 10,000 yuan or $1,400) is 50% (previously 60%).
This means that a person who buys a watch worth 100,000 yuan (around $14,000) overseas will have to pay import duty of 50,000 yuan (around $7,000) when returning to China.
Think what that means for a $60k Watch. And note: the Chinese weren’t the only ones taking advantage of this process. Actual tourists from all over the world – including The Land of the Free – exploited the “loophole.”
The new policy has another change that’s bad news for watchmakers. Back to uk.gov:
We are also ending tax-free sales in airports of goods such as electronics and clothing for passengers travelling to non-EU countries, following concerns that the tax-concession is not always passed on to consumers in the airport.
In some instances these tax-free goods are brought back into the country by UK residents, putting high street retailers at a disadvantage.
I don’t know how much money U.K. tax-free airport sales generated for the watch industry, but it had to be in the millions. Tens of millions? A lot. If the European Union follows suit, the effect on watch sales will be nothing less than catastrophic.
Meanwhile, U.K. watch sellers – and the British tourist industry – are going to take it in the proverbial shorts. Chinese and other foreign smugglers will simply fly to other countries to do their shady business.
On a related side note . . .
The Swiss have placed their bets on luxury watch sales within China, which accounted for around 50 percent of sales pre-COVID 19. A large part of the much touted “recovery” in that market is down to Chinese tourists staying home. It will be interesting to see how the global watch trade balances out when international travel fully resumes.