Thursday, April 28, 2016

UK Freight Forwarders Warned of More Vigilance by HMRC as VAT and Other Logistics Fraud Increases

An Astonishing 168 Billion Euro Shortfall Prompts Action
Shipping News Feature
UK – One organisation which can always be trusted to give sage advice when it comes to ‘touchy’ subjects concerning the logistics industry is the British International Freight Association (BIFA) whose 1,500 + members make up the cream of the country’s freight forwarders. This month the trade group has issued a reminder to those in the industry that it is being increasingly targeted by fraudsters, and HMRC is toughening up and placing ever-increasing emphasis on compliance, with stricter enforcement being an inevitable outcome.

BIFA is reminding its members constantly of the risks that they run when undertaking certain types of business and the need to comply with regulation as the cheats move with customary swiftness to stay ahead of the authorities. One area that is causing considerable concern is VAT fraud and the forthcoming Union Customs Code (UCC), which is being introduced across the European Union (EU) on 1 May and includes legislation that can be used to tighten up certain regimes, possibly to the detriment of those caught in the middle.

BIFA notes that in its latest annual report on the VAT Gap based on 2013 figures, the European Commission showed that the difference between VAT due and collected amounted to €168 billion. Sorry I’ll write that again in case it didn’t register – one hundred and sixty eight billion euros. In real terms this amounts to a VAT shortfall due to fraud and evasion, tax avoidance, bankruptcies and simple miscalculation. BIFA Director General, Robert Keen says that in part the problem is that trade has moved on significantly, whilst regulators have reacted slowly to these changes. He observes:

"In particular, what we will refer to as Internet Trading and the Onward Supply Relief regime seem to particularly lend themselves to fraud. Some overseas websites openly proclaim that they value all goods at a certain price to circumvent the ‘De Minimis’ threshold."

Anecdotally, some BIFA members have become very suspicious of goods being imported under the Onward Supply Relief regime and concerned about their liability relative to VAT. Others are becoming very sceptical about internet-based trade, particularly where the declarant is based overseas. Some members have reported that the pattern of trade and vehicles supplied to move goods for exports from the UK to other EU Members States does not make sense to them. Prior to Christmas 2015, Customs raided warehouses which it was believed contained goods supplied by overseas online traders that were being sold in the UK without VAT being paid or accounted for with goods worth many hundreds of thousands of pounds were seized during the raids.

Large internet traders have been publically-scrutinised and questions have been asked in the House of Lords about the issue. Demands have been made that Amazon become liable for the unpaid VAT of thousands of customers and Customs have been heavily criticised for failing to take adequate steps to stamp out non-compliance. Part of the problem is that it is very difficult to identify who the buyer and seller are. Where the goods are received on a (Delivery Duty Paid) DDP basis and local taxes are invoiced outside the EU there is no guarantee that the VAT will be added to the value of the goods.

Recently BIFA has been contacted by members, which imported goods on behalf of a party outside the EU on a DDP basis. All taxes including VAT were billed back to the origin and the monies never paid, leaving the forwarder out of pocket and goods in free circulation on which VAT had not been paid, undercutting legitimate traders by 20 percent. Then the situation for the import forwarders deteriorated even further as HMRC has demanded payment in full for the unpaid VAT. As there is no other representative in the EU or UK, the forwarder cannot claim the protection of being a Direct Representative, and at best they may be jointly and severally liable as an Indirect Representative, at worst they become Self Representing, with full liability for the Customs debt.

Throughout the EU there is a move towards looking at whether third parties can be held liable for the VAT failings of their customers. Freight forwarders and logistics providers, due to their role, are obvious targets as they facilitate trade across frontiers, provide warehousing and clear goods through customs. Authorities increasingly consider that these providers have an obligation to be aware of the tax status of their customers.

The Union Customs Code includes three elements which may be used by customs authorities as part of their clampdown. The first is that all warehouse keepers under the UCC will be required to provide guarantees on the import duty payable. The second UCC Article which re-enforces an existing requirement simply states that 'the declarant shall be based in the customs territory of the Union'. This has very significant consequences for the unwary. If there is no EU-based company to take responsibility for the import customs declaration the forwarder when clearing goods will have to carefully consider their liabilities because they will become fully responsible for the accuracy of the customs declaration and any debts.

Thirdly, under the UCC many companies will have to seek re-authorisation for current simplifications and regimes. All re-authorisations will need to be undertaken by the 30th April 2019, during this process there will much greater contact than normal between Customs and Trade and the former will as part of their role scrutinise processes and compliance. BIFA is now recommending that the following checks are carried out by forwarders on their customers:

  • Always carry out due diligence checks on new customers including obtaining, where appropriate, VAT and Deferment numbers. For UK limited companies, their Companies House number should be obtained. All details should be verified using the appropriate website. It is essential to ensure that the declarant is an EU-based entity
  • Always challenge the use of multiple EORIs by single entities
  • Incorporate BIFA Standard Trading Conditions into any contract and it is highly recommended that the customers’ acceptance of the terms is confirmed in writing
  • Pay particular attention where business to customer imports are non-EU based online retailers using a fulfilment house model and/or where Customs Procedure Code 42 has been used
  • Where possible ensure that all instructions are in writing

Much of this should be of course obvious to the experienced forwarder but, as so often when a new contract is landed, the initial exuberance can lead to skipping some of the common sense procedures, such as checking those registration details properly before the initial consignments are processed. As Robert Keen concludes:

"Business has and is continuing to change and it is very clear that the opportunity for fraud is rapidly increasing. Normal business relies heavily on trust that both parties are engaged in legitimate trade and that neither party is seeking to conduct business that will damage the others business. However, it is clear that a minority of businesses are established to make money through fraud and other illegal activities. Asking relevant questions will likely result in those engaged in fraud to look to less diligent partners with whom to conduct business."