Supplier & Customer VAT Fraud Risk Checks

Businesses should understand who they are trading with and take reasonable steps to identify potential VAT fraud risks within supply chains. HMRC may consider whether a business has carried out appropriate checks on suppliers, customers and transactions.

This page provides educational guidance on maintaining appropriate records, understanding commercial risk indicators and following published HMRC guidance relating to supply chain due diligence.

Key Points

• Know who you are trading with.
• Verify supplier and customer information where appropriate.
• Retain records of due diligence checks.
• Understand commercial risk indicators.
• Keep contracts, correspondence and transaction records.
• Review unusual transactions carefully.

Sections
Why due diligence matters
Understanding supply chain risks
Supplier checks
Customer checks
Record keeping
Responding to HMRC questions

Why due diligence matters

Due diligence is not paperwork for its own sake. It is the contemporaneous evidence by which a business shows that it took reasonable, proportionate and commercially intelligent steps to understand who it was dealing with, what was being supplied, how the transaction was funded, how the goods or services moved, and whether the supply chain carried a real risk of tax fraud.

HMRC describes due diligence as the appropriate reasonable care a business exercises when entering into business relationships or contracts. It is a series of checks used to identify and manage transaction and supply-chain risk. It is not static. It should be an ongoing, dynamic process which develops as the trading relationship evolves and should be proportionate to the level of risk identified.

In VAT fraud cases, due diligence matters because HMRC may examine whether the business knew, or should have known, that its transactions were connected with fraudulent VAT evasion. The issue is not answered by the existence of invoices alone. The real question is whether the business looked at what the documents showed, considered the commercial reality of the transaction, identified risk indicators and acted sensibly on the results.

A business should therefore be able to explain who it traded with, what checks were carried out, when those checks were carried out, what risks were identified, what further questions were asked, what documents were retained and why the decision to trade was commercially reasonable.

Effective due diligence protects the business, its money and its position with HMRC. It helps prevent the business being drawn into missing trader VAT fraud, counterfeit goods, unpaid tax, false invoices, unsupported repayment claims or high-risk supply chains. It also helps the business respond to HMRC clearly and constructively if questions are later raised.

The strongest position is an organised file: supplier and customer checks, VAT and EORI checks where relevant, Companies House searches, contracts, invoices, bank payments, goods-movement records, correspondence, risk assessments and a clear record of the decision to trade. Due diligence should be repeated where the trading pattern changes, the transaction value increases, the goods or services change, payment arrangements become unusual or any risk indicator appears.

A checklist that is completed mechanically, without regard to warning signs, is unlikely to assist. A business must act on what its checks reveal. If a supplier, customer, payment route, price, delivery arrangement or commercial explanation raises a real concern, trading should pause while the point is investigated and recorded. Where the available evidence indicates a real risk that the supply chain, supplier, customer, goods or transaction may be connected with fraud, the business should not trade unless and until the risk has been properly resolved.

Understanding Supply Chain Risks

Supply chain due diligence requires a business to understand more than the immediate transaction in front of it. HMRC expects businesses to consider whether the transaction makes commercial sense, whether the parties involved appear credible and whether there are any indicators that the supply chain may be connected with tax fraud or other forms of financial crime.

Risk indicators can include unusually low prices, unexplained profit margins, complex trading chains, unusual delivery arrangements, inconsistent documentation, goods that appear to change hands without a clear commercial reason and payment routes that do not match normal business practice. Businesses should also consider whether the supplier or customer has the resources, trading history and commercial infrastructure necessary to carry out the transaction.

Goods movement is an important part of supply chain risk assessment. Businesses should understand where goods originate, how they are transported, who takes ownership at each stage and whether the movement of goods is supported by appropriate records. Where concerns arise, businesses should seek further information and retain evidence of any enquiries made.

HMRC guidance emphasises that due diligence should not be limited to immediate counterparties where risk indicators exist. Businesses may need to understand wider supply chain relationships where circumstances suggest a heightened risk of fraud or tax loss.

Supplier Checks

Before entering into a trading relationship, businesses should take reasonable steps to verify the identity and credibility of their suppliers. The level of checking should be proportionate to the nature, value and risk profile of the transaction.

Supplier verification may include reviewing Companies House records, confirming VAT registration status, checking EORI numbers where relevant and ensuring that any required licences, approvals or regulatory registrations are in place. Businesses should also consider whether supplier contact details, trading addresses and banking arrangements appear consistent and commercially credible.

It is often sensible to understand how long the supplier has been trading, whether they have a visible business presence and whether their trading history supports the type of transaction being proposed. Contract terms, pricing arrangements and payment instructions should also be reviewed carefully to identify anything unusual or inconsistent.

The purpose of supplier checks is not simply to complete a checklist. Businesses should assess the information obtained and consider whether any risks require further investigation before proceeding with the transaction.

Customer Checks

Businesses should apply appropriate verification procedures to customers as well as suppliers. Understanding who the customer is, what they are purchasing and how the transaction fits within their normal business activities can help identify potential risks at an early stage.

Customer due diligence may include confirming identity, reviewing VAT registration details, checking EORI numbers where relevant and verifying delivery addresses. Businesses should consider whether the proposed transaction has a clear commercial purpose and whether the goods, services or quantities involved are consistent with the customer’s stated business activities.

Payment arrangements should also be reviewed carefully. Payments received from unrelated third parties, unusual funding arrangements or requests that differ from standard commercial practice may justify further enquiries. Businesses should retain evidence of any additional checks carried out where concerns arise.

A clear understanding of the customer, the transaction and the intended market for the goods or services can help demonstrate that reasonable care was taken before entering into the trading relationship.

Record Keeping

Effective due diligence depends upon maintaining clear, organised and contemporaneous records. If HMRC later raises questions regarding a transaction or supply chain, the business should be able to demonstrate what checks were carried out, when those checks were completed and what conclusions were reached.

Businesses should retain copies of supplier and customer verification checks, Companies House searches, VAT and EORI confirmations, correspondence, contracts, invoices, payment records and any risk assessments prepared as part of the due diligence process. Where goods are involved, delivery documentation and goods-movement records should also be preserved.

Records should be retained in a manner that allows them to be retrieved quickly and presented clearly if requested. An organised record-keeping system can help support a business’s position during compliance checks, repayment reviews and other HMRC enquiries.

Responding To HMRC Questions

Where HMRC raises questions regarding a transaction, supplier, customer or supply chain, businesses should respond in a clear, organised and evidence-based manner. The objective should be to explain the commercial reality of the transaction and demonstrate the reasonable care taken before and during the trading relationship.

Responses should be supported by relevant records, including due diligence checks, correspondence, invoices, contracts, payment evidence and any other documentation that explains how the transaction was conducted. Businesses should be prepared to explain why they decided to trade, what risks were considered and how any concerns were investigated or resolved.

Where official HMRC guidance was relied upon when making decisions, it may be helpful to identify the relevant guidance and explain how it was applied to the circumstances of the transaction. Clear explanations supported by evidence are often more persuasive than broad assertions or unsupported statements.

Maintaining a professional and constructive approach throughout the process can help ensure that HMRC receives the information required to understand the transaction and reach an informed decision.