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HMRC internal manual

VAT Fraud

Due diligence and risk assessment: HMRC guidance on due diligence

Notice 726 explains how a taxable person could be made jointly and severally liable for the unpaid VAT of another VAT-registered business when he buys and/or sells specified goods. It also explains how a taxable person can avoid being caught in VAT fraud, primarily MTIC fraud (VATF23500)

Paragraph 4.4 of states:

It is in your interests to check carefully who you are dealing with. In order to help you avoid being unwittingly caught up in a supply chain where VAT goes unpaid, this notice contains some examples of reasonable steps you can take to establish the integrity of your customers, suppliers and supplies.

Paragraph 4.6 states:

The examples contained in this notice are only guidelines for the kind of checks you could make to help avoid dealing with high-risk businesses and individuals. The checks you will need to make, and the extent of them, will vary depending on the individual circumstances of your trade and you are free to ask the most appropriate questions required to protect yourself in the particular circumstances of your individual transactions. A definitive checklist would merely enable fraudsters and those willing to turn a blind eye, to ensure that they can satisfy such a list.

Paragraph 6.2 provides examples of checks which can be carried out by taxable persons to ensure the integrity of their supply chains and states:

These may also help you to decide what checks you should carry out, but … you should decide what checks you need to carry out before dealing with a supplier or customer.

HMRC is not prescribing a list of checks that must be carried out. What it is saying is that the taxable person reading the notice should carry out appropriate and proportionate due diligence and risk assessment checks to address the risks to the business of the particular transactions that are being contemplated.

It is important to bear in mind that one of the aims of due diligence and risk assessment is to enable the taxable person ‘to make a judgement on the integrity of [his] supply chain and the suppliers, customers and goods within it’ (paragraph 4.5). Therefore checks undertaken purely in relation to the taxable person’s immediate suppliers and customers will not necessarily be sufficient to achieve this (VATF74000).