Fulfilment House Due Diligence Scheme (FHDDS) and what it means to you.

The Fulfilment House Due Diligence Scheme (FHDDS) is a regulatory framework introduced by HM Revenue and Customs (HMRC) in the UK to combat VAT fraud in the e-commerce sector. This scheme requires fulfilment houses like CBF, which store goods imported from outside the EU (now updated to reflect Brexit and apply to non-UK imports) via our customers and their manufacturers, to register with HMRC and comply with specific due diligence and record-keeping requirements.

The primary aim of the FHDDS is to ensure that non-UK businesses selling goods via e-commerce platforms comply with UK tax regulations, particularly VAT obligations. By targeting fulfilment houses, the UK government seeks to prevent VAT evasion by foreign sellers who might otherwise avoid declaring and paying VAT.

FHDDS aims to ensure that fulfilment houses like us at CBF Fulfilment, which store goods imported from outside the UK on behalf of sellers, comply with UK tax and customs regulations. This scheme is crucial for maintaining the integrity of the supply chain and preventing tax evasion and fraud.  Over 80% of goods in our warehouses are imported from foreign manufacturers and over 60% of our clients are based offshore.

Why Registration is Mandatory

If your 3PL business stores goods in the UK for sellers established outside the UK, you are required to register under the FHDDS. This registration is mandatory for several reasons:

1. Compliance with UK Law: Operating without FHDDS registration is illegal. Businesses must apply for and receive approval from HMRC before commencing operations.
2. Preventing Tax Evasion:The scheme helps HMRC monitor and ensure that overseas sellers comply with UK tax obligations, reducing the risk of tax evasion.
3. Maintaining Supply Chain Integrity: Registration ensures that all parties in the supply chain are accountable and adhere to due diligence practices.

Benefits to Your Clients and Potential Customers

1. Trust and Credibility: Being registered under the FHDDS demonstrates your commitment to legal compliance and ethical business practices. This builds trust with your clients and potential customers.
2. Reduced Risk: Clients can be assured that their goods are handled by a compliant and reputable 3PL provider, reducing the risk of legal issues and penalties.
3. Enhanced Transparency: Registration requires maintaining detailed records and conducting due diligence checks, which enhances transparency and accountability in your operations.

 

What is the impact on Foreign Businesses not based in the UK?

Legal Compliance

Foreign businesses looking to sell products in the UK through e-commerce must ensure their chosen 3PL/fulfilment partner is registered under the FHDDS. This is crucial because non-compliant fulfilment houses cannot legally store goods imported into the UK. Using a registered fulfilment house helps ensure the foreign business meets its VAT obligations and avoids potential penalties or legal issues.

 

VAT Registration

It is mandatory for foreign sellers to register for VAT in the UK if their taxable turnover exceeds the VAT registration threshold or if they choose to operate under the UK VAT regime. This registration is necessary for accounting for VAT on sales to UK consumers and must be handled regardless of whether the fulfilment house is FHDDS-registered.

 

Record Keeping and Documentation

Foreign businesses must maintain accurate records of their transactions, including:

- Details of goods stored in the UK.

- Sales invoices.

- VAT records and returns.

 

These records need to be thorough and compliant with UK tax laws to ensure proper VAT declaration and payment.

 

What are the requirements for us as your chosen 3PL order processing partner?

FHDDS Registration

The most critical requirement is that the chosen third-party logistics (3PL) partner must be registered under the FHDDS. This registration indicates that the fulfilment house complies with the due diligence and reporting standards set by HMRC, which includes:

- Conducting regular checks on their clients (the foreign businesses) to ensure they are VAT-registered.

- Keeping accurate records of the goods stored and dispatched.

- Reporting any suspicious activities or non-compliance to HMRC.

 

Due Diligence Practices

The 3PL partner must perform rigorous due diligence, including:

- Verifying the identity and VAT registration status of their clients.

- Maintaining detailed records of the goods stored, including descriptions, quantities, and movement logs.

- Ensuring clients are aware of and comply with UK VAT regulations.

 

Record Keeping

Fulfilment houses must keep comprehensive records, which include:

- The import entry numbers.

- The nature and quantities of goods stored.

- Records of orders and dispatches.

- Evidence of VAT paid on goods.

These records are crucial for HMRC audits and must be retained for at least six years.

 

Legal Trade Requirements

VAT Registration and Compliance

Foreign businesses must ensure they are VAT-registered in the UK if required and that they adhere to ongoing VAT obligations, including filing VAT returns and paying any VAT due.

 

Accurate Labelling and Documentation

Goods must be correctly labelled and documented. This includes:

- Accurate customs declarations.

- Correct HS codes for goods.

- Proper labelling for compliance with UK product regulations (e.g., CE marking for certain products).

 

Adherence to UK Import Regulations

Businesses must comply with all UK import regulations, which may include:

- Import duties and tariffs.

- Compliance with product standards and safety regulations.

- Correct packaging and labelling according to UK laws.

 

Consequences of Choosing a Non-Registered 3PL

If a 3PL provider is not registered under the FHDDS, it can have severe implications:

1. Legal Penalties: Operating without FHDDS registration can result in significant penalties, including fines up to £10,000 and potential criminal prosecution.
2. Goods Forfeiture: Goods stored by an unregistered fulfilment house are liable to be seized and forfeited by HMRC³.
3. Reputational Damage: Clients may lose trust in a 3PL provider that fails to comply with legal requirements, leading to reputational damage and loss of business.
4. Operational Disruptions: Non-compliance can lead to operational disruptions, including the suspension of services and legal proceedings.

Registering your 3PL business under the FHDDS is not just a legal requirement but a strategic move to enhance your business’s credibility, trustworthiness, and operational efficiency. It reassures your clients and potential customers that their goods are in safe hands, and managed by a compliant and reputable provider. Non-compliance, on the other hand, can lead to severe legal, financial, and reputational consequences. Therefore, ensuring your 3PL business is registered under the FHDDS is essential for sustainable and successful operations.

The FHDDS plays a crucial role in ensuring VAT compliance for foreign businesses selling goods in the UK via e-commerce. It imposes specific responsibilities on fulfilment houses and their clients, requiring meticulous record-keeping and due diligence. Foreign businesses must carefully select their 3PL partners to ensure they are FHDDS-registered and compliant, facilitating legal and smooth trading operations in the UK market. Compliance with these regulations not only helps in avoiding legal issues but also builds trust and credibility with UK consumers and authorities.