FHDDS40100 – Record Keeping and Due Diligence – HMRC Internal Manual

Due diligence is a range of business controls designed to prevent a business from committing or becoming involved in fraud. It is usually a comprehensive assessment undertaken by one business on another business before entering into a transaction or signing a contract or agreement. Insufficient due diligence when making decisions about whom to negotiate with increases the risk of being involved in fraud. This may demonstrate a reckless attitude towards tax obligations or may even be evidence of an intent to participate in and profit from fraudulent arrangements.

Under the Fulfillment House Due Diligence Scheme, certain checks and record keeping are required by law, but there are many other checks a business can undertake to ensure it is dealing with companies legitimate and compliant.

The checks that a person approved by an enforcement firm can carry out, and the extent to which, will vary according to the individual circumstances of their business and they are free to ask the most appropriate questions necessary 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 business parties evolves. Reasonable care is about exercising good judgment and acting sensibly. The due diligence actually exercised by a company must be proportionate to the level of risk it identifies. It must be undertaken before entering into new agreements or undertaking new transactions, as well as on existing agreements.

Good due diligence goes beyond simply obtaining a company’s name, address and VAT number. Good due diligence should seek to examine the viability and legal status of the business concerned.

Customer Due Diligence and Record Keeping

A fulfillment company must retain the following information for a period of six years:

  • name and contact details of each client
  • VAT registration number or, in cases where the overseas customer is exempt from VAT registration, perhaps because they are only supplying zero-rated supplies in the UK, a reference number from VAT exemption
  • a description of the imported goods in storage for that customer, including the type and quantity of those goods
  • the import entry number of the imported goods – including the date
  • the country to which these goods are delivered from storage
  • a copy of the notice of obligation given to each client

These records should be made available for inspection by an HMRC officer if required.

Checking a customer’s VAT registration number

The fulfillment company must verify the VAT registration number held against each foreign customer.

When an executing business starts operating from April 1, 2019, it must verify the VAT registration numbers of its overseas customers within 30 days from the date it receives the approval from HMRC.

If a fulfillment company starts doing business with a new foreign customer, they must complete the verification within 60 days from the date they started doing business with that customer.

Fulfillment companies should ensure, as a good practice, that they repeat the verification of the VAT registration numbers of their foreign customers every 12 months, as indicated in notice FH1: the due diligence program of Fulfillment House or in accordance with any frequency specified by HMRC in the Notice of Approval. for this undertaking.

When a solution has been determined, it will be updated with the details of the NETP check that needs to take place.

Checking a customer’s VAT exemption reference number

Regulation 11 sets out the rules for an authorized enforcement person/company to verify a customer’s VAT registration number. We do not prescribe how often further checks should be carried out, it will be up to the business to assess the risks of how often they think they need to check each customer’s details.

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

Where an overseas customer is exempt from VAT registration, for example because they only make zero-rated supplies in the UK, HMRC will provide that customer with a VAT exemption reference number.

These must also be checked with HMRC in accordance with the above deadlines and must also be renewed annually (or in accordance with the frequency specified by HMRC in the Execution Company Approval Notice).

HMRC will advise how this should be reported to HMRC. In accordance with the guidelines of the FH1 gov.uk notice.

There were rule changes on 1 January 2021 for overseas sellers selling property located in the UK through an online marketplace (OMP). This means that the OMP now accounts for VAT on the sale in the UK of the overseas seller’s goods (https://www.gov.uk/guidance/vat-and-overseas-goods-sold-to-customers-in -the-uk-using-on-line-marketplaces). In order for the foreign seller to be able to recover the import VAT, a “deemed zero-rated” delivery takes place between the foreign seller and the OMP. The overseas seller can still be VAT registered in the UK. However, it can also mean that the foreign seller is no longer required to be VAT registered and can apply for an exemption certificate as all of their supplies are zero-rated. But in doing so, he would then not be able to recover the import VAT and the absorption of this import VAT, because the blocking of the tax could be considered unusual. A different entity cannot report and recover import VAT. Not wanting to be VAT registered could also suggest that import VAT is avoided.

Notifying HMRC when an overseas customer of a fulfillment company fails to comply with UK VAT and/or customs duty rules

The fulfillment company must notify HMRC where they know or have reasonable grounds to suspect that the overseas customer has failed to meet a VAT or customs duty obligation in respect of imported goods which are or have been stored for this customer. Notification must be made within 30 days of becoming aware of the contravention. The enforcement company risks a penalty of £3,000 if they fail to comply with this obligation. Fulfillment company should email HMRC at [email protected]

This is covered in more detail in FHDDS40300 and FHDDS50000.

The fulfillment company should ensure that they work with their foreign customer to try to ensure that they begin to comply with their VAT and/or customs duty obligations. The fulfillment company should monitor the situation for the next 40 days (from the date they identify the problem). If the problem is not resolved, the fulfillment firm must stop doing business with this non-compliant foreign customer – they must do so as soon as “reasonably possible”.

Meaning of ‘reasonably practicable’ – it is not possible to specify a date by which HMRC expects an enforcement business to cease trading – there are practical difficulties in unraveling a business relationship and an enforcement business ‘execution will need time to arrange for the removal of the goods from foreign customers. So this means in practice that the fulfillment business should be able to demonstrate to HMRC that they are taking steps to cease trading from that date (i.e. 40 days from the date on which it knows or has reasonable grounds to suspect) in cases where it cannot take advantage of its commercial relationship with its customer to start complying with its VAT/customs duties obligations.

Commissioner’s opinion

In certain circumstances, HMRC may notify a fulfillment company that one of its customers has failed to meet a VAT or duty obligation. In these circumstances, a fulfillment firm has 40 days from such notification to work with its foreign client to ensure compliance and must cease working with them if they are not successful. Such notification by HMRC will be considered a circumstance in which the fulfillment company “knows” for the purposes of the legislation that its customer has failed to meet a VAT/customs duty obligation.

Examples of Due Diligence

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

  • obtain copies of certificates of incorporation and VAT registration certificates
  • get signed letters of introduction on letterhead
  • obtain some form of written and signed business references
  • obtain credit checks or other background checks from an independent third party
  • insist on personal contact with a senior manager of the potential supplier, making an initial visit to their premises whenever possible
  • obtain the bank details of potential suppliers, in order to check whether:
    • payments would be made to a third party; and
    • that in case of importation, the supplier and his bank share the same country of residence.
  • check details provided against other sources e.g. BT website, letterheads, landline records
  • Buy online
  • pro forma invoices
  • delivery notes
  • CMR (Road Goods Convention) or air waybills

The above list is not exhaustive.

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

(Production Companies Regulations 2018, Regulation 11)

Regulation 11 sets out the rules for an authorized enforcement person/company to verify a customer’s VAT registration number. We do not prescribe how often further checks should be carried out, it will be up to the business to assess the risks of how often they think they need to check each customer’s details.

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


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