VATF74000 - Due diligence and risk assessment: Acting on the results

Examples of the types of due diligence that a taxable person could undertake are set out in Notice 726, paragraphs 6.1 and 6.2, which is itself discussed at VATF73000.

The important thing to remember is that merely making enquiries is not enough. The taxable person must take appropriate action based on the results of those enquiries. Therefore, for example, if the taxable person has undertaken effective due diligence / risk assessment on its supplier and that due diligence / risk assessment shows one or more of the following results in relation to the supplier:

  • only been trading for a very short period of time,
  • managed to achieve a large income in that short period of time,
  • a poor credit rating,
  • returned only partly completed application or trading forms,
  • contacted the taxable person out-of-the-blue etc,

and yet the taxable person still goes ahead and trades without making any further enquiries, this could lead to the conclusion that the due diligence / risk assessment was casually undertaken and of no value.

The above example, when considered alongside the circumstances of the transactions (VATF60000), could help to establish:

  1. that the taxable person ‘knew’ of a connection with fraud, because he has merely gone through the motions of carrying out due diligence / risk assessment, with no real intention of acting on the results; and/or
  2. that the taxable person ‘should have known’, because he has ignored indicators that should have led him to conclude that connection with fraud was the only reasonable explanation for the transactions being offered.