INSIGHT: U.K. Fulfillment House Due Diligence Scheme—Do You Need to Register?

This is a new legal requirement for U.K. businesses that store and distribute goods in the U.K. for sellers that are established outside the EU. Referred to as Fulfillment Houses (“FH”) these businesses not only include the likes of Amazon and eBay, but also any third party logistical provider and U.K. based warehouse keeper that facilitates the storage and distribution of goods on behalf of their overseas clients.

The aim of the scheme is to ensure that VAT is being accounted for on goods sold by overseas sellers (i.e. mainly through online sales). The Fulfilment House Due Diligence Scheme (“FHDDS”) places strict requirements on the FH which included an obligation to have registered for the scheme before June 30, 2018. Those wanting to launch a new FH business have a slightly longer lead-in time to complete the necessary online application process.

However, all FHs must ensure that detailed information relating to their overseas customers is obtained and that their customer’s U.K. VAT status is confirmed and available for inspection by HM Revenue and Customs (“HMRC”) before April 1, 2019.

HMRC are still accepting late registrations but penalties of 500 pounds ($650) a month (up to a maximum of 3,000 pounds) are likely to be imposed for those that were required to register before the June 30, 2018 deadline. Failure to comply by April 1, 2019 could mean that an FH may not be allowed to continue trading in the U.K. and could risk a penalty of 10,000 pounds and/or a criminal conviction.

What is the FHDDS?

In late 2017, HMRC announced a new registration scheme for businesses that facilitate the storage and distribution of goods that fulfill orders on behalf of sellers established outside the EU. HMRC have become increasingly concerned with the number of overseas sellers that simply don’t register for U.K. VAT, which has resulted in a substantial loss of VAT revenue. This also results in overseas sellers obtaining an unfair advantage over domestic VAT registered sellers.

In short, businesses that are not based in the U.K. are legally required to register and charge VAT on goods supplied in the U.K. to non-registered customers. There is no turnover threshold for overseas businesses, so (unlike U.K. established businesses that can take advantage of the current 85,000 pound annual threshold) they are subject to U.K. VAT from the very first sale made in the U.K.

HMRC are placing the onus on the FH to ensure that their overseas customers are fully compliant with the U.K. VAT requirements. Over the last few years, HMRC have been extending the principles of an expectation for businesses to exercise reasonable care in the supply chain and to undertake meaningful due diligence processes. More and more weight is being placed on firms to carry out extensive and regular checks on the companies and individuals they deal with and to retain records of these checks for inspection by HMRC.

This type of due diligence can be traced back to the issues faced by HMRC with missing trader intra-community (“MTIC”) frauds and the increased control on the movements of alcoholic goods in respect of excise duty. With diminishing resources becoming available to HMRC, the onus is being transferred onto businesses to “police” the compliance processes.

The FHDDS means that a business that currently functions as an FH (or wishes to begin operating as an FH) will need to be approved by HMRC before April 1, 2019. HMRC believe that there could be up to 5,000 FHs operating in the U.K., and view these as a major risk to the revenue in terms of VAT lost from non-EU traders failing to meet their VAT obligations. Many of these FHs will have numerous overseas businesses that use their facilities and HMRC’s worry is that the FH may know very little about the businesses that are using its warehousing facilities, and even less about their tax status.

What Will an FH be Required to do After April 1, 2019?

As of April 1, 2019, an FH will have to collate a substantial amount of information that goes beyond a rudimentary check on the customer’s VAT registration number. The FH’s records must include:

• the name and contact details for each customer;

• the customer’s VAT registration numbers or evidence indicating exemption from registration;

• the type and quantity of goods stored at the warehouse;

• all import entry numbers relating to the arrival of the goods into the U.K.;

• details of the destination countries where the goods are delivered after leaving the warehouse;

• copies of any HMRC notices given to each customer that show what is expected of the customer in respect of their U.K. tax obligations.

More tellingly, HMRC expect the FH to “work with their customers to make sure they meet their obligations.” This culminates with a requirement to refuse to act for the customer if their compliance does not continue or ceases. Once again, there is an expectation from HMRC that the FH will play a very proactive role in policing the new scheme.

Penalties are suitably draconian (up to 10,000 pounds and/or a criminal conviction) for continuing to operate as an FH without registration and approval by HMRC. There are further penalties of between 500 and 3,000 pounds for each individual for failure to retain proper records or failure to notify HMRC of any breaches by a customer.

Potential Problems

The practical difficulties are obvious, especially for an FH that works with many small overseas suppliers that could number in the hundreds and are largely based in the Far East. Couple this with a responsibility to educate these customers and the cost implications are clear.

Most FHs would be expected to hold data on their customers by way of a commonsense commercial approach. The problem lies with collating, checking and identifying “problem” customers and deciding upon a course of “education,” or deciding at which point to refuse to continue to allow that customer to use the FH facilities.

Of equal concern could be the expansion of the “Kittel” or “means of knowledge” argument being applied in certain circumstances where a tax loss occurs involving two or more businesses and any suggestion of “deliberate conduct.” Used by HMRC as one of the definitive pieces of case law in MTIC cases at the Tax Tribunal, at what point would HMRC take the view that an FH “should or could have known” that a customer was not meeting their tax obligations? If the FH does not act quickly or forcefully enough to prevent a loss of tax could there be a risk of joint and several liability being applied?

Where Are We Now?

The new scheme is already having an impact, with many of the larger FHs now requiring all their overseas customers to prove their U.K. VAT registered status. In some instances, FHs are advising overseas businesses to incorporate a U.K. company so that it can take advantage of the 85,000 pound annual VAT registration threshold. Care should be taken here, as this may require more than an incorporation at Companies House to create an establishment for VAT purposes. It could also have more serious direct tax implications. In one recent case, an FH refused to accept an overseas business onto its customer list because it was not VAT registered, even though all its sales were zero-rated food and it had no obligation to be registered in the U.K.

So, even at this late stage, as an FH, if you have any doubt as to whether you should be registered under the scheme, HMRC are suggesting that you apply. If it turns out that you don’t need to be registered, the application can be withdrawn but you have avoided the risk of further penalties for a failure to register.

Planning Points

All FHs should (if they have not already done so):

• submit a registration application for the scheme;
• start to carry out checks on their overseas customers; and

• keep accurate records of their customers and of the transactions involving goods accepted into their facility.

Finally, having submitted a registration application, even if this was done in advance of the June 30, 2018 deadline, HMRC have indicated that they will not start to issue responses until the middle of August 2018, with some FHs not receiving any communication until December 31, 2018.

Hence, it is worth maintaining a constant dialogue with HMRC to ensure that any application is being expedited.

Simon Sutcliffe is Customs Duty Partner and Alan Pearce is VAT Partner with Blick Rothenberg, U.K.
They may be contacted at: simon.sutcliffe@blickrothenberg.com; alan.pearce@blickrothenberg.com