EDDC02040 - The due diligence condition: HMRC’s expectations of businesses carrying out due diligence
Businesses must carry out due diligence, including risk assessments and checks, properly to reasonably judge the integrity of the supply chains, suppliers, customers and goods they intend trading, or continuing to trade, in. They must also demonstrate a reasonable knowledge of the markets they are entering. The checks and information gathered during the due diligence process should be proportionate to the risks they have identified in their risk assessment.
Material routinely gathered without regard to a risk is of limited value. For example, a business would not need to hold detailed market information for low volumes of duty-paid supplies to UK retail outlets, but could reasonably be expected to understand and be able to evidence the consumption and market share of popular UK brands where they supply high volumes to, or receive these from, non-UK destinations.
Where appropriate (for example, where risk indicators indicate that there may be a possible link to fraud), the business should consider the supply chain as a whole, as checks undertaken solely on immediate suppliers and customers may not provide sufficient information to identify and assess the real level of risks it faces. You should carefully consider what the business can realistically and reasonably test. This is because detail of trade up the chain will be bound by commercial confidentiality clauses. Also detailed knowledge of commercially sensitive information lower down the chain could in itself place a question mark over the trading arrangement. In some cases a view to the onward supply chain can be gained by considering where the goods are going, is there a market for them there? Etc. Action taken by the business must be proportionate to the risks identified. If concerns exist, the business should be able to demonstrate that the arrangement is not linked to fraud before trading. In some cases businesses may employ a third party solicitor, who can promise confidentiality, to explore their supply chains further to gain further assurance; whether a business decides to do this would be a commercial decision.
Businesses should not be trading where there is a link to fraud and must take appropriate action based on the results of its enquiries. Where checks indicate that the supply being tested, whether goods or services, has a medium to high chance of being linked to fraud the business must reasonably show from the facts it has gathered that the supply was not linked to fraud.
Some trade bodies and associations have issued excise due diligence guidance to their members. When considering a member of a trade body or association’s due diligence you should establish if they were aware of and followed any external guidance. Where you identify deficiencies in this guidance, external guidance or our notices you should alert Indirect Tax Policy using the guidance manual contact for this guidance.