FHDDS40100 - Record keeping and due diligence

Due diligence is a range of commercial checks with the aim of preventing a business committing or being involved in fraud. This is usually a comprehensive appraisal undertaken by one business on another business prior to entering into any transactions or signing any contract or agreement. Insufficient due diligence when making decisions on who to trade with increases the risk of becoming involved in fraud. It may demonstrate a reckless attitude towards tax obligations or may even be evidence of intent to take part and profit from fraudulent arrangements.

Within the Fulfilment House Due Diligence Scheme regulations some checks and record-keeping are mandatory under the law, but there are numerous other checks that a business can undertake in order to assure itself that it is dealing with legitimate, compliant businesses.

The checks a fulfilment business approved person can make, and the extent of them, will vary depending on the individual circumstances of their trade and they are free to ask the most appropriate questions required to protect themselves in the particular circumstances of their individual transactions.

Due diligence is not static but an ongoing, dynamic process that develops as the relationship between the trading parties evolves. Reasonable care is using sound judgement and acting in a sensible manner. The actual due diligence carried out by a business should be proportionate to the level of risk it identifies. It should be undertaken prior to entering into new agreements or undertaking new transactions as well as being undertaken on existing arrangements.

Good due diligence goes beyond merely obtaining a business’s name, address and VAT number. Good due diligence should seek to look at the viability and legal position of the business involved.

Customer due diligence and record keeping

A fulfilment business must maintain the following information for a period of six years:

  • name and contact details of each customer
  • VAT registration number or, in cases where the overseas customer is exempt from VAT registration, perhaps because they make only zero rated supplies in the UK, a VAT exemption reference number
  • a description of the imported goods stored for that customer, including the type and quantity of such goods
  • the import entry number of the imported goods (these are flagged as Movement Reference Number (MRN) within the Customs Declaration Service (CDS))
  • the country to which such goods are delivered from storage
  • a copy of the Notice of Obligations given to each customer

These records must be made available for inspection by an HMRC officer when required.

Verification of a customer’s VAT registration number

The fulfilment business must verify the VAT registration number held in relation to each overseas customer.

Where a fulfilment business starts trading on or after 1 April 2019, it should verify its overseas customers’ VAT registration numbers within 30 days from the date on which it receives approval from HMRC.

If a fulfilment business starts to work with a new overseas customer, it must carry out the verification within 60 days from the date on which it started trading with that customer.

Fulfilment businesses should ensure as good practice that they repeat the verification of their overseas customers’ VAT registration numbers every 12 months as set out in Notice FH1: the Fulfilment House Due Diligence Scheme or in accordance with any frequency specified by HMRC in the Notice of Approval for that fulfilment business.

When a solution has been determined this will be updated with the details of what NETP checking must take place.

Verification of a customer’s VAT exemption reference number

Regulation 11 sets out the rules for an approved person/fulfilment business to verify a customer’s VAT registration number. We do not prescribe how often other checks should be made, this will be up to the business to risk assess how often they think they should verify each customer’s details.

HMRC will set out the due diligence conditions in the Notice of Approval (see FHDDS24100).

Where an overseas customer has an exemption from VAT registration, for example because it makes only zero rated supplies in the UK, HMRC will provide that customer with a VAT exemption reference number.

These must also be verified with HMRC in accordance with the timescales above and should also be renewed annually (or in line with the frequency specified by HMRC in the fulfilment business’s Notice of Approval).

HMRC will set out how this is to be reported to HMRC. In accordance with Notice FH1 gov.uk guidance.

There were rule changes on 1 January 2021 for overseas sellers selling goods located in the UK via an online marketplace (OMP). These mean that the OMP now accounts for the VAT on the UK sale of the overseas seller’s goods (https://www.gov.uk/guidance/vat-and-overseas-goods-sold-to-customers-in-the-uk-using-online-marketplaces). In order for the overseas seller to be able to reclaim the import VAT, a ‘deemed zero-rated’ supply takes place between the overseas seller and the OMP. The overseas seller can still be registered for VAT in the UK. However, it can also mean that the overseas seller is no longer required to be registered for VAT and it can apply for an exemption certificate because all its supplies are zero-rated. But by doing so, it then could not reclaim the import VAT and absorbing this import VAT as sticking tax could be viewed as unusual. A different entity cannot declare and reclaim the import VAT. Not wanting to be registered for VAT could also suggest that import VAT is being avoided.

Notifying HMRC where an overseas customer of a fulfilment business does not comply with VAT and/or customs duty rules in the UK

The fulfilment business must notify HMRC where it knows or has reasonable grounds to suspect that the overseas customer has not met a VAT or customs duty obligation in relation to imported goods that are being, or have been, stored for that customer. The notification must be made within 30 days of business becoming aware of the contravention. The fulfilment business risks a £3000 penalty if it fails to comply with this obligation. The fulfilment business should email HMRC at notificationofnoncompliance.fulfilmenthouse@hmrc.gov.uk

This is dealt with in greater detail in FHDDS40300, and FHDDS50000.

The fulfilment business should ensure that it works with its overseas customer to try to ensure that it begins to comply with its VAT and/or customs duty obligations. The fulfilment business should monitor the situation over the next 40 days (from the date it identifies the problem). If the problem is not resolved, the fulfilment business must cease to trade with that non-compliant overseas customer - it should do so as soon as is ‘reasonably practicable’.

Meaning of ‘reasonably practicable’ - it is not possible to specify a date by which HMRC expects a fulfilment business to cease trading - there are practical difficulties in unwinding a commercial relationship and a fulfilment business will need time to make arrangements for the removal of the overseas customers’ goods. So, what this means in practice is that the fulfilment business should be able to demonstrate to HMRC that it is taking steps to cease trading from that date (i.e. 40 days from the date it knows or has reasonable grounds to suspect) in cases where it cannot leverage its commercial relationship with its customer to begin meeting its VAT/customs duty obligations.

Commissioner’s Notification

In some circumstances, HMRC may notify a fulfilment business that one of its customers has not met a VAT or duty obligation. In these circumstances, a fulfilment business has 40 days from that notification to work with its overseas customer to ensure their compliance and must cease to work with them if they are not successful. Such a notification by HMRC will be deemed to be a circumstance where the fulfilment business ‘knows’ for the purposes of the legislation that their customer has not met a VAT/customs duty obligation.

Examples of due diligence

The following are examples of the types of due diligence a fulfilment business might wish to undertake and maintain.

  • obtain copies of Certificates of Incorporation and VAT registration certificates
  • obtain signed letters of introduction on headed paper
  • obtain some form of written and signed trade references
  • obtain credit checks or other background checks from an independent third party
  • insist on personal contact with a senior officer of the prospective supplier, making an initial visit to their premises whenever possible
  • obtain the prospective suppliers bank details, to check whether:
    • payments would be made to a third party; and
    • that in the case of an import, the supplier and their bank shared the same country of residence.
  • check details provided against other sources, e.g. website, letterheads, BT landline records
  • purchase orders
  • pro-forma invoices
  • delivery notes
  • CMRs (Convention Merchandises Routiers) or airway bills

The above list is not exhaustive.

It is important to remember that a fulfilment business that uses a third party to undertake its due diligence remains responsible for ensuring that adequate due diligence and risk assessment procedures are in place.

(The Fulfilment Businesses Regulations 2018, regulation 11)

Regulation 11 sets out the rules for an approved person/fulfilment business to verify a customer’s VAT registration number. We do not prescribe how often other checks should be made, this will be up to the business to risk assess how often they think they should verify each customer’s details.

HMRC will set out the due diligence conditions in the Notice of Approval, see FHDDS24100.