George Osborne told to avoid weak compromise with retailers after launching inquiry into airport VAT scam

Some airport shops appear to have been pocketing savings from VAT exemptions rather than charging lower prices

A duty-free retailer at Heathrow, London. Airport shops appeared to be keeping millions in VAT relief – rather than passing savings on as price cuts for customers (Reuters)

George Osborne has been warned that his review into whether shoppers get a fair deal on airport VAT exemptions must listen to “strong consumer voices” to avoid a weak compromise with retailers.

The inquiry has been welcomed by consumer rights campaigners, after The Independent exposed earlier this year how some airport shops appeared to be pocketing the savings from VAT exemptions rather than charging lower prices. But experts said there was a risk that it could favour retail chains over customers.

Customers expressed outrage in August on discovering they were being asked to show their boarding passes at tills not because of security demands but instead so the chains could claim back VAT if people were travelling to non-EU countries. It appeared that retailers were pocketing millions of pounds in savings without passing them on in the form of lower prices.

The Chancellor announced the “extensive” review on 30 December, after the Treasury estimated that some airside retailers were keeping up to 50p of every £1 of potential VAT savings for themselves.

Insisting that “VAT relief at airports is intended to cut prices, not to be a windfall for shops”, Mr Osborne said it was “simply unacceptable” that “many people could be paying over the odds because the Government’s VAT concession isn’t passed on.”

But there remains concern that the Chancellor’s rhetoric may not be matched by results when the HMRC review reports back in early 2016.

Paul Lewis, the presenter of Radio 4’s Money Box Live, told The Independent: “I hope the review will be thorough – but that may be the triumph of hope over experience.

“Once you get Government reviews involving the commercial sector, the result is very often a compromise that is not satisfactory for consumers. Unless there are some very strong consumer voices [involved] there is a danger the review will be dominated by retailers who are very good at raising all the problems they would have in making any change from a system that is very profitable for them.”

He added: “I would like to think the Chancellor will make sure this review is done properly. I really don’t know why he took so long to order it ... the issue was exposed by your newspaper some time ago.”

Since The Independent laid bare what became known as “the airport VAT scam”, some retailers have argued it would be hard to create a two-price system splitting travellers within the EU, where VAT must be paid, from those going to non-EU destinations, where VAT exemptions applied.

Consumer expert Sarah Pennells, creator of the SavvyWoman website, warned, however, that those conducting the review should be wary of giving too much weight to this argument. “It might have been tricky 20 or 30 years ago, but in an age where retailers almost know when we are leaving the house before we do, it is perfectly possible to have a button for non-VAT sales,” she said. “Some of what has been going on is totally wrong.”

She was backed by Martin Lewis, founder of MoneySavingExpert.com, who said: “The retailers argue it is too difficult to do, but I think that is simply baloney. The fact that millions of [firms] process discount codes every year means the technology is there.”

A Treasury spokeswoman said: “The whole purpose of the review is to look at why consumers don’t get the benefits they are entitled to from VAT savings. If it were to end up as a cosy agreement with retailers, there wouldn’t be any point in it.”