03 April 2018

Freight Forwarding and Warehousing Businesses Must Wake Up to Fulfilment House Regulations  

Register by June or Face Penalties

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Shipping News Feature UK – With the inception of HMRC's Fulfilment House Due Diligence Scheme the government has announced a comprehensive package of measures to disrupt and deter a fraud which it estimates may be costing the Revenue around £1.5 billion annually. The way the scheme is set up means there are serious implications for freight forwarding and warehousing operations which distribute goods on behalf of a client.

HMRC says a Fulfilment House is a person or company who, by way of business, stores third country goods, (i.e. currently those imported from a place outside the EU member states), which are owned by a person who is not established in a member state, or alternatively stores third country goods on behalf of a person who is not established in a member state (such as an agent acting on behalf of the owner), at a time when there has been ‘no supply of goods in the UK’ (in other words bought directly from the originator), and the goods are being offered for sale in the UK.

This means an administrative burden for anyone bringing in goods, or simply distributing them, usually applicable to online retail operations but not exclusively so, and the regulations are aiming at bringing to heel non-compliant overseas traders themselves by making them appoint a UK tax representative who will be liable for their VAT and/or seeking a security. If these traders fail to comply and online marketplaces do not help stop the abuse occurring, the online marketplaces themselves, will become jointly and severally liable for the unpaid VAT.

Common sense and history says that HMRC will have neither the political will, nor the ability, to pursue a claim against an online retailer, an entity usually registered in a far flung overseas territory such as China, and therein lies the logic for the new scheme. HMRC is determined that someone available to them will be found liable in a case where VAT has been deliberately avoided.

This effectively means that any overseas client will need to have made arrangements to appoint liability for VAT. There is to be an exemption scheme but HMRC, whilst introducing preliminary Fulfilment House rules from April 2018, have said the full details of exemption will only be available in April 2019. The Fulfilment House is also bound to ensure that the overseas supplier is bona fide. A bona fide overseas supplier is one that is either VAT registered in the UK, or legitimately non-registered here either because they make no supplies in the UK or operate from an establishment in the UK and are trading below the registration threshold.

It is not all bad news despite the immediate apparent start of the scheme. Anyone needing to register as a Fulfilment House, i.e. a company which takes in goods from overseas and then distributes them from their store to a variety of end users (not a simple forwarding import consignment) has to do so by June 2018. Although the scheme doesn’t officially go ‘live’ until April 2019, any company engaged in fulfilment services as of 31 March 2018 is required to register with HMRC by 30 June this year. Those failing to do so in time will incur a £500 fine for every month that they are late, up to a maximum of £3,000.

The Fulfilment House has a duty of care to not only ensure that all Customs procedures are duly followed, but to regularly inspect elements of the shipments to ensure all the details given are correct and to inform HMRC if they develop any suspicions that an act of avoidance has been, or might be, committed. This means going against the normal shipping practice whereby a freight forwarder or importing warehouse never inspects contents unless foul play is suspected, as we pointed out in a previous article, and to HMRC (answer came there none). Anyone registering as a Fulfilment House should therefore inform their client, overseas or otherwise, that they will be routinely examining samples of the goods, much as HMRC are entitled to do. A photographic log would be a useful addendum to the written records.

Opening the client’s goods however is not the end of the matter. Such examinations must be logged in a central record together with all other relevant details such as client identity, import entry details, VAT records, details of shipments and goods, dates and times etc. This information must be retained by the Fulfilment House for a period of six years and made freely available should HMRC wish to inspect it. It is in the gift of HMRC to decide whether these examinations have been made thoroughly and regularly enough and there has been no guidance whatsoever up to now on this point, nor is there likely to be as each case will presumably be judged by an HMRC inspector on its own merits.

In the case of high value and security enhanced goods, e.g. mobile phones with security sealed packaging, one can see the potential for legal action should a Fulfilment House tamper with the goods prior to end user delivery. Such items are likely to be rejected out of hand by the designated purchaser with ay charges becoming a matter of dispute.

Overseas businesses using Fulfilment Houses for the storage and distribution of their goods will need to comply with their obligations regarding VAT and declare the correct amount of VAT and duty if they want to continue operating. HMRC will be publishing a list of registered Fulfilment Houses so that freight and customs agents, parcel companies and other businesses will know whether the Fulfilment House they are collecting goods from, or delivering into, is registered or not.

The number of overseas businesses registering for VAT in the UK rose tenfold in 2016 when the scheme was first announced and this figure continues to rise. Meanwhile advice from HMRC to anyone considering becoming a Fulfilment House is to ensure they are also registered as an Authorised Economic Operator (AEO) and to comprehend the diverse risks involved should they fail in their Duty of Care. For example failure to comply with the mandatory ‘inspect and record’ guidelines might render a company liable for a prosecution under Trading Standards regulations. Howard Catherall, a partner at Suffolk based Gotelee Solicitors, illustrates the risk thus:

“If a shipment comes in stating that a carton contains 100 toasters, you can’t simply say you have the carton and the import numbers match up. It requires someone to open the carton and check it does indeed contain toasters, and the right number of them. If a faulty toaster went out and subsequently injured someone, inevitably Trading Standards will follow the audit trail back and ask: you looked at the toasters, what did you do to satisfy yourself that they were safe?

”[The record keeping] in itself is particularly onerous, the operator has to do this for each and every individual or business based outside the EU which sells non-EU goods on line, at a time when they are stored in the UK warehouse. It is an incredible amount of work. This is a completely new system of regulation and operators simply can’t afford to ignore it, HMRC says there is systematic under-declaration of value and misdeclaration of goods, with no VAT being paid following the online sale.”

Already steps are being taken to ensure operators comply with the incoming regulations. Gotelee for example has developed a user-friendly App which enables companies involved in e-commerce distribution to go through a series of defined steps to check the safety of the products they are handling. The App will guide the operator through a simple checklist, looking at issues from labelling to CE marks; with a red for ‘quarantine’ system. Gotelee says it will flag up any problems and enable the operator to make swift decisions where a product appears to be non-compliant.

Freight and warehouse interests will get the first chance to see this latest development at the company stand, number 7014, during the 2018 Multimodal show at Birmingham’s NEC running from 1-3 May.

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