The fashion designer Sir Paul Smith has told Sky News that a campaign to overturn the so-called tourist tax is not just about “helping rich shoppers coming to buy cheap handbags”, but boosting the wider economy.

In an interview with Business Live, he explained why he added his name to a letter to the chancellor – signed by 400 business leaders – demanding the decision to scrap VAT-free shopping for international visitors is overturned.

It was reported over the weekend that Jeremy Hunt had asked the Office for Budget Responsibility to review the tax which, according to estimates, rakes in about £2bn for UK public coffers.

The tax break ended when the UK left the European Union in 2020.

It had previously allowed foreign visitors from outside the EU to reclaim VAT on purchases in Britain, in the same way they do when shopping across the bloc.

It was abolished by then chancellor Rishi Sunak on the grounds that the benefits were almost entirely enjoyed by a handful of businesses in central London.

Luxury brands, hotel and restaurant chains and tourism chiefs have lobbied strongly since that their recoveries from the COVID pandemic have been severely dented by overseas visitors choosing to spend their money in destinations like Paris and Milan instead.

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Sir Paul told Ian King: “It’s not always necessarily about rich shoppers coming to buy cheap handbags, it’s the fact that when they’re here, they do spend money in our great cities.”

He made the case for an economic boost from tourism while revealing that a third of his business relies on the tourism market.

“My passion is that the Royal Academy, the National Gallery, the lovely hotels… all the European hotels we’ve seen come back after the pandemic and we haven’t so… it’s about bringing people to the country and seeing all the fantastic things we’ve got.”

Shares in luxury retailers were up on Monday in response to the story of the OBR’s review in The Sunday Times.

Burberry climbed 2.3% and Watches Of Switzerland Group rose 3.6% at the open.

Hotel stocks were also up, though not by as much.

The hospitality sector argues that the tourist tax has been a factor behind its need for additional support since the pandemic.

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The recently released hospitality market monitor from CGA by NIQ and AlixPartners showed that 6,180 licensed premises had closed between December 2023 and the same month a year earlier.

It meant that almost 23,000 venues had closed in total over the past three years, with the cost of living crisis and impact of interest rate rises to control inflation taking an additional toll.

Russell Nathan, senior partner at the accountancy firm HW Fisher, suggested he would be surprised to see no action on the issue at the budget.

“The chancellor can no longer ignore the significant damage that has been done,” he wrote.

The UK economy and its reputation amongst tourists has suffered dramatically… beyond increased sales and the number of tourist visitors, the reversal will also entice overseas retailers to invest more in the UK, which in turn will create new job opportunities across the entire supply chain.”

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