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Do freight forwarders and fulfilment warehouses need to rethink their business model?

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Are you a freight forwarder or fulfilment warehouse? You may think that you currently enjoy a position in the supply chain which leaves you free from the interference of Regulatory bodies such as Trading Standards, HMRC, HSE and MHRA. But all that could be about to alter as the government sets in motion legislative changes which will alter the way in which we do business with the Far East, says Stephen Brown of Gotelee Solicitors.

Budget 2016 had more to it than the obligatory arguments over duty rises on fuel, tobacco and alcohol. Hidden within the red box was a plan to tackle VAT avoidance, by targeting the supply and logistics chain here in the UK to ensure that perceived inadequacies in the system are shored up. 20% of all non-food retail spending occurs online in the UK. Much of these goods are manufactured outside of the EU and imported.

HMRC believe that overseas (outside of the EU) operators are flooding the marketplace with goods they have failed to pay the correct duty on. These are goods, often already here in the UK due to rules imposed by the online market places such as Amazon and Ebay, are sold through online transactions on UK websites. A UK agent or warehouse providing a service, will simply fulfil the order. There are many links in the supply chain, but the responsibility and liability of that agent looks set to change completely.

The taxman is looking to identify an entity in the UK, which will be responsible at all times for the VAT and other duty due on the imported products. This will apply to goods located in the UK at the time at which the purchase is made online. Effectively this will cover goods held at fulfilment houses up and down the country. Fulfilment businesses will be asked to register to confirm they have procedures in place to show due diligence in respect of their customers. Often, these customers will be contacts in the Far East whom they have never laid eyes on, such is the nature of the modern business world.

The problem comes at the point of customs declaration. HMRC say that often goods are knowingly undervalued and VAT is avoided. They say system is being abused by operators who apply for temporary VAT (EORI) numbers and use them above the allowed threshold, as well as by those who use false or stolen VAT numbers. HMRC have neither the means nor the powers to police this fully. This allows the overseas operators to undercut UK based businesses by keeping their costs low. Anybody in the business knows that the difference between a click and a converted sale in a busy online marketplace such as Amazon can come down to a matter of 1 pence. Price often beats quality and customer service in the brutal cyber high street.

The legislative changes will also directly affect freight forwarders and clearance agents who declare goods to HMRC on behalf of other operators outside the EU. They will become liable for the unpaid duty if anomalies are uncovered. You may find that your main customer is forced to find a UK representative for their VAT and taking that role on yourself could present a huge financial risk. The alternative is to appoint a VAT representative but any appointment can be vetoed by HMRC so your customer could be forced away from the UK and into other thriving markets such as the US and Germany. It should be said, that the reasonableness of any such veto could be open to legal challenge.

Whether you act as a freight forwarder, fulfilment house, customs clearance agent or anyone else in the E-commerce supply chain, these changes could heavily affect the way you currently operate, as well as leaving you open to punitive measures. HMRC work in conjunction with other regulatory bodies at the ports and Trading Standards and HSE have repeatedly made clear their intention to deal with what they see as the fulfilment house “issue”. It is probable they will welcome these changes as it will allow them to gain intelligence and seek the prosecution of businesses which, up until now, have operated perfectly legally. A redrawing of the scope of due diligence, to encompass, for in stance, fulfilment houses could leave operators open to corporate liability issues in respect of unsafe products passing through their warehouses. Having spent time working at the cutting edge of the regulatory fight against what is often seen by them as a threat to UK business, I also understand how UK business is reliant upon the fluidity of trade which currently exists thanks, in part, to the fulfilment house arrangement.

A lot of people fail to realise, that Amazon themselves are the biggest fulfilment service in the UK. The fulfilment model was the pivotal factor in their inexorable success. It will be interesting to see if these “big fish” face the same pressures from Local Authorities and other governmental bodies over the coming years as their smaller counterparts.

Make no mistake, these legislative changes will have a wide reaching impact. Tightening the marketplace adds an extra layer of risk to some, but could result in the need for a complete reversal of the business model of others as they recoil in fear. HMRC have compiled a consultation document on their Fulfilment House Due Diligence Scheme which underpins the first step to tightening up the regulations. They are looking for feedback from concerned parties and the deadline for feedback is 30 June 2016.

For more information on how you can protect and future proof your business against these changes, as well as advice on your liability dependent on your position in the supply chain you can contact our expert team here.

Steve Brown has spent time working with the National Trading Standards Board and has undertaken research in conjunction with HMRC on the legislative arrangements surrounding the liability attached to those in the supply chain as well as creating guidance for enforcement agencies to identify dangerous products imported into the EU. Steve now advises a range of operators, both in Suffolk and beyond,  on their business model and their responsibilities within the complex EU and UK legal framework.

Last Updated ( Tuesday, 27 March 2018 14:22 )