Fulfilment House Due Diligence Scheme: Who Must Apply and What You'll Nee

Welcome to Bezos, your one-stop solution for all your eCommerce fulfilment needs. Today, we're diving deep into the Fulfilment House Due Diligence Scheme (FHDDS). If you're an eCommerce business owner, this guide is a must-read for you. 

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What Is FHDDS?

The FHDDS is a UK government initiative managed by HM Revenue and Customs (HMRC). Enacted by the Finance (No.2) Act 2017, the scheme mandates fulfilment centre businesses to maintain detailed records and conduct thorough checks on their international clients who sell goods to UK customers. It is a critical framework for maintaining tax integrity by ensuring that such companies are not part of any supply chain that leads to Value Added Tax (VAT) evasion or fraud.

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Why Should You Care About FHDDS?

The FHDDS is not just another bureaucratic hoop to jump through. It's a requirement that helps businesses in the fulfilment industry identify and mitigate risks, ensuring that they operate in a legal and ethical manner. 

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As discussed above, the scheme is designed to ensure compliance with tax and customs regulations, as well as to prevent VAT fraud and the illegal importation of goods. Failure to comply can have serious consequences for both fulfilment houses and their clients. It can result in severe financial penalties, reputational damage, and even imprisonment. 

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Hence, conducting due diligence not only protects the owners’ business interests but also ensures that they are not inadvertently involved in illegal activities. So, if you run a fulfilment company where you're storing goods in the UK for sellers outside the country, you need to be in the know.

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What Are the Key Requirements of FHDDS?

Navigating the complexities of the FHDDS involves more than just a cursory understanding; it requires strict adherence to a set of key requirements. Below, we delve into these essential criteria that every fulfilment house must meet to operate compliantly within the UK.

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• HMRC Approval: You must secure authorisation from HMRC. This involves submitting an application and undergoing a “fit and proper” test to assess your suitability for operating within the scheme.

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• Customer Vetting: It's not just about storing goods; you also have a responsibility to know your customers. Maintain a comprehensive database that includes their identities, contact details, and VAT registration numbers. Plus, perform due diligence checks to verify the legitimacy of your customers' businesses, especially if they are based overseas.

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• Inventory Tracking: Document the types and quantities of merchandise kept for each client. This should include information such as product descriptions, stock-keeping unit (SKU) numbers, and the country of origin for the articles.

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• VAT Documentation: Ensure that you have access to relevant VAT documentation for the products you store. This could include importation documents, invoices, and any other tax-related paperwork.

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• Regular Reporting: Depending on the stipulations set by HMRC, you may be required to submit regular reports detailing your adherence to the scheme's requirements. Failure to do so can result in penalties.

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• Training and Compliance: Ensure that your staff are well-trained and aware of the obligations under the FHDDS. This includes training on how to thoroughly vet customers and maintain accurate records.

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• Data Security: Given the sensitive nature of the information you'll be handling, robust data security measures must be in place to protect client information and financial data.

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• Audits and Inspections: Be prepared for periodic audits and inspections by HMRC. To this end, ensure all records are up-to-date and easily accessible for review.

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Who Must Apply for FHDDS?

Here, we break down the key factors that determine whether your business needs to register under this important compliance framework.

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• Imported Goods: The scheme specifically targets goods that have been imported from countries outside the UK. If your fulfilment centre stores such items, registration is mandatory.

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• Ownership: The ownership criterion focuses on the entity that owns the stock. If they are owned by a business or individual based outside the UK, they must register under the FHDDS.

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• Goods for Sale: The scheme also covers items that are retained in the UK but are intended for sale and have not yet been sold to a consumer within the country. This means even if the goods are not yet part of a transaction, they still fall under the purview of the FHDDS.

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Simply, if you are a UK-based fulfilment centre that deals with international clients, you are obligated to register for the FHDDS. This applies irrespective of the size or scale of your operations.

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Who Doesn't Need to Apply for FHDDS?

Understanding who is exempt from the FHDDS is equally important as knowing who must apply. Generally, the following entities are not required to register:

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• UK-Based Retailers: If you are a retailer based in the UK and all the merchandise you keep is owned by your own business.

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• Non-Commercial Storage: Facilities that store items for non-commercial purposes, such as personal storage units, are generally excluded.

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• Goods Not for Sale: If the goods are not intended for sale, such as those in transit or personal belongings.

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• Export-Only Businesses: If your fulfilment centre exclusively houses stock that is intended for export out of the UK.

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• Registered Charities: Organisations that are focused on philanthropy and operate fulfilment centres may be exempt, provided the articles stored are used for charitable activities.

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• Temporary Storage: Facilities that keep goods for a very short period, typically less than 12 hours.

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• Specialist Warehouses: Some types of specialist storage facilities, such as cold storage for perishable items, if they are not intended for sale within the UK.

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When to Apply for the FHDSS

It's essential to apply for FHDDS approval before initiating any fulfilment operations for overseas clients. This ensures that you are compliant from the outset. After submitting your application, it generally takes several weeks for HMRC to process it. During this period, you may be asked to provide additional documentation or clarifications.

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As also highlighted above, once your application is reviewed, HMRC may conduct a “fit and proper” test to assess your suitability for operating within the scheme. This could add more time to the application process. Upon successful completion of all checks, you will receive an approval letter. This letter will include your unique registration number and other relevant details. 

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Keep in mind that FHDDS approval is not indefinite. You will need to renew your registration periodically, as specified by HMRC, to continue operating legally.

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Documents Required for the FHDDS Application

Ensuring you have all the necessary documents ready before you start the application process can significantly streamline your FHDDS registration. See what you need below:

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Business Registration Certificate

This is the official certificate that proves your business is legally registered in the UK. If you don't already have this, it can usually be obtained from Companies House or the relevant registering authority for your business type.

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VAT Registration Certificate

This certificate confirms that you are registered for VAT and provides your VAT identification number. If you're not already registered, you can apply for this through the HMRC website.

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Proof of Address

HMRC needs to verify the location where the fulfilment activities will take place. Utility bills, lease agreements, or mortgage statements are generally acceptable forms of proof. These should be recent and display the business name and address.

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Additional Documents

While the above are the primary documents required, be prepared to provide further documentation, such as:

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• Passport, driving license, or other government-issued ID 

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• Information about your business bank account

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• Copies of agreements or contracts with your international clients

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How to Maintain Records

Maintaining accurate and comprehensive records is a cornerstone of compliance with the FHDDS. Here's details on what records to keep, how to store them, and for how long:

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Goods Received and Dispatched

For each shipment received or dispatched, document the following:

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• Type of goods
• Quantity
• Date of receipt or dispatch
• Origin or destination address

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Customer Invoices

Keep a copy of all invoices issued to or received from customers. These should include:

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• Customer's name and address
• Description of goods
• Total amount billed
• VAT charged, if applicable

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VAT Documentation

Maintain all VAT-related documents, such as:

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• VAT returns
• VAT payment receipts
• VAT registration certificate

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Storage Guidelines

Records can be kept in either digital or physical format, as long as they are easily accessible and well-organised. Given their sensitive nature, ensure they are stored securely, whether digitally encrypted or in a locked physical storage space.

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All records must be kept for at least six years, in accordance with UK tax law. They should be readily available and easily retrieved in case of an audit or inspection by HMRC.

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How to Apply for the FHDDS

Navigating the application process for FHDDS can be complex. Here's a detailed guide on how to apply:

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HMRC Registration

Before you can apply for the FHDDS, you must be registered with HMRC. If you're not already, you can do so via their website. During this registration, you'll be required to provide basic information about your business, including its legal structure, primary activities, and tax identification numbers.

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Application Submission

Once registered, you can proceed to complete the FHDDS application form. You’ll be asked for various details, such as your business address, the types of goods you'll be storing, and information about your international clients. Be prepared to upload any required supporting documents, such as business licenses or proof of identity.

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Client Vetting

As part of the application process, you'll need to conduct due diligence on your international clients. Keep records of all activities, as you may be required to present these to HMRC either during the application process or at a later date.

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What Does the Due Diligence Process Involve?

Due diligence refers to a series of checks and verifications that fulfilment houses are required to perform on their overseas clients. Its aim is to ensure that their customers are legitimate businesses that comply with VAT regulations. The process generally entails:

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• Identity Verification: Confirm the identity of the business or individual you're dealing with. This often involves checking official documents like licenses or passports.

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• VAT Registration: Verify the VAT registration number of the overseas client. This can usually be done through the VAT Information Exchange System (VIES) or similar databases.

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• Business Status: Review the legal status of the business. Is it a registered company, a sole trader, or some other form of business entity?

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• Financial Health: Some fulfilment houses go a step further by assessing the financial stability of the client, although this is not a mandatory requirement under FHDDS.

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• Background Checks: Look into the business history of the client. Have they been involved in any legal disputes, especially those related to tax evasion or fraud?

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• Contractual Agreements: Ensure that your agreements with overseas customers include clauses that require them to comply with all relevant tax laws and regulations.

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• Ongoing Monitoring: Due diligence is not a one-time activity. Regular checks should be performed to ensure that the client continues to adhere to all applicable legal and regulatory frameworks.

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Penalties for Non-Compliance

Non-compliance with the FHDDS can have severe repercussions for your business and reputation, both legally and financially. Consider the penalties you could face:

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Criminal Liability

Failure to comply with FHDDS regulations can result in criminal charges, which may include imprisonment. The duration can be up to seven years, depending on the severity of the offence and whether it's a repeat violation. Criminal charges can also lead to a tarnished business reputation, making it difficult to attract clients or investors in the future.

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Civil Liability

Civil penalties include fines imposed by HMRC for contraventions of the scheme's regulations. These can go up to £3,000 for each individual breach, depending on the nature and severity of the violation. Note that fines are levied per contravention, meaning multiple infringements can result in a significant financial burden.

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Additional Repercussions

In extreme cases, HMRC may revoke your approval to operate as a fulfilment house, effectively shutting down that aspect of your business. They maintain a list of non-compliant businesses, which is publicly accessible. Being listed can also severely damage your business reputation.

Moreover, defending against both civil and criminal penalties can result in substantial legal fees, adding to the financial strain on your business.

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Preventive Measures

Start by conducting internal audits to ensure compliance with all FHDDS regulations. Additionally, seek advice from legal experts familiar with UK tax law and specific requirements to ensure you're fully compliant. Lastly, don't underestimate the value of staff education. Make sure your team understands the critical importance of complying with FHDDS to avoid unintentional violations that could lead to severe penalties.

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Why Choose Bezos for FHDDS Compliance?

Navigating the complexities of the FHDDS can be a daunting task. That's where Bezos comes in. As a full-service fulfilment provider operating in locations like the UK, Australia, New Zealand, and throughout Europe, we're not just about storage and delivery. We're about providing a seamless, compliant, and efficient fulfilment process that aligns with FHDDS requirements.

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• Time-Saving Technology: Our proprietary AI technology identifies and resolves logistical issues before they become a problem, saving you precious hours and potential penalties.

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• Transparency You Can Trust: With Bezos, you get real-time, end-to-end tracking of your inventory and orders. This ensures you're always updated, so that you can make informed decisions for your business.

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• Expert Support: Our dedicated account managers ensure your orders are in safe hands. We respond to tickets within two hours because your time is valuable.

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• Global Reach: Looking to expand your UK drinks brand or Australian consumer brand into new markets? Our network spans 63 fulfilment centres in 17 countries, with 109 last-mile delivery services.

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• Cost-Effective: Save £1 to £2 per order and up to 80% on international orders. Plus, enjoy the flexibility of no long-term contracts or hidden fees.

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• Values-Driven: Our core values of Good Karma, Tribe Behaviour, Radical Transparency, and Powerful Drive resonate in every interaction, making us the ideal partner for your FHDDS compliance journey.

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Don't leave your FHDDS compliance to chance. Choose Bezos and experience fulfilment that's not just about moving boxes, but about moving your business forward in a compliant, efficient, and scalable way.

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Speak to an expert for a customised FHDDS compliance plan and start saving now.

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Conclusión

Navigating the intricacies of the FHDDS is no small feat. From understanding who must apply and the stringent due diligence requirements to the severe penalties for non-compliance, there's a lot to digest. 

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However, compliance is not just a legal necessity but also a business imperative. It safeguards your operations, fortifies your reputation, and, ultimately, protects your bottom line. As the eCommerce landscape continues to evolve, staying ahead of regulatory changes is crucial. By adhering to FHDDS guidelines, you not only ensure that your business remains on the right side of the law but also gain a competitive edge in a crowded marketplace.

But why go it alone? Bezos offers a full-service, transparent, and efficient fulfilment solution that aligns with all FHDDS requirements. Get your free quote today and take the first step towards hassle-free, compliant fulfilment.