To ask the Chancellor of the Exchequer whether he has completed his consideration of Her Majesty's Customs and Excise report of its review of value added tax and other aspects of free zones; and if he will make a statement.
I have considered very carefully the Customs' report of the review which was announced in the White Paper "Building Businesses … Not Barriers". I have also borne in mind the representations I have received concerning free zone rules. Some of the changes sought by free zone operators would be contrary to European Community legislation and others would be contrary to the interests of fair competition with the rest of the economy.I have concluded that the existing rules are generally equitable and are soundly based. There is no evidence that they discourage the entrepot trade which the free zones were designed to encourage.However, I have decided that one change to the present rules is desirable to allow greater flexibility to free zone traders. Where goods manufactured in free zones are removed to the rest of the United Kingdom, import VAT is presently charged on their full value, including the value of United Kingdom materials, labour and overheads. This system of charging import VAT on United Kingdom elements is unique to free zones and was introduced to avoid the need for possibly complex calculations to ascertain the import VAT due on the imported elements alone. I am prepared to accept traders' assurances that such calculations can be made without undue difficulty. I propose to remove the anomaly and allow traders to pay import VAT on the imported elements only. However, traders may continue to pay tax on the full value if they prefer to avoid the need to support a claim to a lower value.The necessary amendments to the Free Zone Regulations 1984 (SI 1984 No. 1177) will be laid before the House shortly.