The global rise in e-commerce has seen a boom in the use of fulfilment houses. Providing storage, breaking bulk, unpacking, re-packing and subsequent delivery to clients’ customers, these businesses have become popular for many
online sellers.

Despite their rapid growth in popularity, though, fulfilment houses can pose a number of difficulties for their operators.

For example, HMRC has recently increased the number of unannounced fulfilment house inspections it is undertaking.

Crucially, HMRC consider fulfilment houses an area of tax risk since their customer may not be accounting properly for VAT and duty on goods imported and sold in the UK.

HMRC seems to be adopting a hardline approach and has issued on the spot fines if operators of fulfilment houses are unable to produce the information requested. Fulfilment houses are responsible for fines and penalties if customers are not compliant with VAT and customs rules. Unfortunately, the risk of such penalties for non-compliance has only increased since Brexit.

Fulfilment houses typically offer a range of services, including order processing, inventory management tools, warehousing, shipping and returns management for ecommerce businesses. If the fulfilment house manages inventory for sellers based outside of the UK, they are required to register with the Fulfilment House Due Diligence Scheme (“FHDDS”) controlled by HMRC.


The FHDDS requires the warehouse operator to undertake due diligence on overseas depositors to the warehouse and keep extensive records. They are required to maintain the following information:

  • The name and contact details of each customer
  • The UK VAT registration number of each customer
  • A description of the type and quantity of the third country goods stored for each customer
  • Any import entry number of the third country goods stored for each customer
  • The country to which the third country goods are delivered from storage
  • A copy of the notice they are required to give customers about their UK tax and duty obligations
  • Any specified further information relating to customers and third country goods.

This information must be retained for six years and must be made available for inspection by an HMRC officer when required.

HMRC can issue £1000 fines where fulfilment houses have not been able to produce any of the above information immediately.

The warehouse operator does not have fullcontrol over the goods deposited in their warehouse, however, and mistakes can easily be made. Operators are required to notify HMRC if they consider any of their customers are not compliant with VAT and Customs regulations.

In this way, the fulfilment house operators are taking on personal responsibility for ensuring not only that they hold the above information but also that its customers are compliant with VAT and Customs obligations. Running a fulfilment house, therefore, involves considerable risk, and mistakes can be made.

Is there an alternative?

Similar benefits to those of a fulfilment house can be achieved by operating a customs warehouse. Customs warehouses must be authorised by HMRC, however, they are not as onerous to run as fulfilment houses and pose less personal risk for the operator. Customs warehouses can be any size and shape, from a large warehouse to a small stockroom. A public warehouse can be used by multiple companies and private individuals.

The advantages of a customs warehouse over a fulfilment centre include the following:

  • Imported goods can be stored duty and VAT free before the duty becomes payable when the goods enter free circulation. This can provide cash flow benefits for the importing business.
  • Customs entries are made at the time the goods leave the warehouse, providing automatic relief from VAT and duty for goods damaged or destroyed whilst in the warehouse. Duty and VAT relief also apply if the number of items delivered is different from that expected on the consignment.
  • In some circumstances, a customs agent will undertake due diligence checks before any customs entries are made. Therefore, they should be able to answer any questions that might be raised by HMRC thus reducing the risk of noncompliance for the customs warehouse user.
  • Goods that have been imported into the UK and then re-exported are not liable for VAT or duty in the UK.
  • Goods can be stored duty free whilst awaiting processing.
  • Customs controlled goods can be stored alongside goods that are in free circulation.

There are other benefits to running a customs warehousing that could be achieved by entrepreneurial warehouse operators. For example, authorisation can be given by HMRC, enabling the customs warehouse to start and clear transit entries, offering an additional income stream for the operator.

Overall, fulfilment centres may be becoming outdated and high risk now that HMRC are demanding that warehouse keepers keep an ever-increasing number of records and conduct extensive checks on their clients to ensure tax compliance. As an alternative, all processes that can be done by a fulfilment centre can be carried out in a customs warehouse whilst avoiding the same level of risk and responsibility for ensuring customer tax compliance. It certainly is something worth considering.