CISR85080 | CIS fraud measures: Due diligence and risk assessments: introduction

When looking at the due diligence / risk assessment undertaken by the person you should determine and document:

• What due diligence / risk assessment checks were performed

• When/how regular the due diligence/risk assessment checks were performed

• What the results of the checks indicated

• What purpose they believed the checks served

• To what extent they were appropriate, adequate and timely in relation to addressing the risks identified, and

• Whether the person took appropriate action in response to the results of the checks.

Due diligence is the appropriate reasonable care a business uses when entering trading relationships or contracts with other businesses. It involves checking information about those businesses.

Due diligence is to inform the person the risk of entering into the transaction. They should therefore be being performed beforehand. The only exceptions would be for urgent work and then done immediately after. Lack of due diligence alone is unlikely to provide sufficient evidence that a business knew, or ‘should have known’ there would be deliberate non-compliance in the supply chain. However, where it can be established that checks conducted or contracts entered into would have given cause for concern, then this will be highly relevant in deciding whether the person ‘should have known’.

Deficiencies in due diligence may help support a case where HMRC alleges that a person ‘knew or should have known’ about a deliberate failure to comply where there are other factors present. If transactions are contrived, or where contracts appear too good to be true, it can be inferred that a person may have failed to carry out meaningful due diligence because they knew it was unnecessary since it is pre-arranged and connected to a deliberate failure to comply.

Equally, in a case involving actual knowledge, the person may present HMRC with what appears to be pristine due diligence paperwork. Where there is paperwork of due diligence, the validity of the checks purportedly carried out will be important.

If a person has genuinely done everything they can to check the integrity of the supply chain, can demonstrate they have done so, have taken heed of any indications that tax may go unpaid and have no other reason to suspect tax would go unpaid, it is unlikely they knew or should have known there would be a deliberate failure to comply