Thursday 27 October 2022

 

DSO never did it for me....

DSO?

Although I have been out of front line Credit for some years I remain fascinated by the fixation of DSO as a key performance indicator; worse still, that it’s tagged in with bad debt levels as measure of credit effectiveness.

Let’s look at DSO.

It’s a simple calculation of total receivables divided by sales in the period multiplied by the number of days in the period.

It simply cannot be an accurate measure if any of the following are evident:-

variable period or monthly accounting or indeed cut off dates and given not all months have 30 days

  • ·         Variable credit terms are applied across the client base
  • ·         Credit does not have absolute control of credit terms or credit granted
  • ·         Invoice date only style aged debt reports are produced
  • ·         Ledger credit balances are included in Receivables
  • ·         Sales volumes during period are erratic or heavily loaded at period or month end
  • ·         High volume of ‘corrective’ credit notes are issued in following month
  • ·         Cash sales in the month are included
  • ·         Credit has insufficient influence in dispute resolution
  • ·         Customers have set payment run dates

Some will argue they know it’s a dismal KPI but this is what they are told to report and if consistently applied, it must provide some level of collection efficiency. It really doesn’t.

 

Collection effectiveness (CE) is a far more accurate measure and this looks at how well Credit collects debt on the basis of terms applied.

To be able to work this, the following has to apply:-

  • ·      Aged debt reporting schedules produced on a due date basis according to credit terms applied on each client account
  • ·     Credit balances must be added back so as not to distort true debtor values in total and across aged columns.
  • ·     Cash sales must be excluded from revenue value
  • ·     Credit must have total control of terms granted and dispute management
  • ·     Aged buckets reflect a percentage of total debt and also separately, a percentage against each respective prior month’s sales. One can see in this way how debt moves from one aged period into the next.

 If you still insist on tradition, throw in a standard DSO and Past Due DSO!

 

Over the course of twelve months, using such measures, one will see a recurring trend in aged buckets and will be able to predict with quite a high degree of accuracy how much of each respective aged bucket will be collected in the current period, rendering huge consistency in cash forecasting. It also provides insight into how each aged debt bucket can be improved on. It’s a great way of showing how effective you are in collecting debt.

Indeed, why not interrogate receivables ageing further; segment according to credit term grouping, by sales team designated, by salesperson allocated, designated collector or by industry sector.

 

How much ‘Control’ do you really have?

 

It’s quite pleasant in a way to sit on the periphery of cash collection and look inward at those tasked with the job in recent years.

Automation and digitalisation is not new and one could be forgiven for reading article after article expanding on the benefits to be had in cash collection, eradicating the manual processes that took up one’s time and thinking this was nirvana, a sure fire guarantee of success in managing cash.

It isn’t of course.

It helps, and I know this from first-hand experience automating processes as far back as the mid 1990’s but ultimately, it matters not a jot if you have all this automation to handle new accounts, credit line, payment terms, terms and conditions, order processing/release, risk monitoring, dunning letters, call reminders and dispute resolution unless you as a Credit Manager or your team have the sole approval to control all this.

If you don’t and have to accommodate infringements, ergo other people being allowed to dictate in each aspect of the order to cash process then you are unlikely to ever achieve optimised collection and will forever be chasing somebody else’s tail with inconsistent collection performance from one month to the next.

Credit Managers or senior people engaged in Credit need to ensure they work on the foundations of effective Credit Management and that means getting your Board Directors to recognise what you need to deliver the absolute best in terms of O2C performance. One can achieve this by working initially on a sound Credit Policy with clearly defined approval levels that prevents anyone else other than you directing this O2C orchestra.

It’s not always easy arriving at such a point but determination and ongoing results are frequently enough to pull you over the line. Recognition comes at a price, it’s not a free ride; It has to be worked at and fought for.

Businesses need consistency in cash turnover and they need to have confidence that as they grow this consistency will remain constant and in line with growth.

Nothing distresses me more than sitting in meetings hearing what I consider to be senior credit people talk of ‘others’ agreeing credit, order release  or extended terms, then saying their own KPI’s are DSO and Bad Debt based calculations. Set aside for a moment that these two measures are not adequate performance indicators, how can one possibly achieve the result when others control the ball and field of play?

The only two people who could conceivably over-ride Credit decisions in any approval matrix and Credit Policy should be the CEO or CFO and even then, with discussion and the agreement of the Head of Credit. This way, at least even those awful measures of DSO and bad debt could have some meaning.

Wednesday 5 May 2021

 

Personal Guarantees.

In an article published in the CICM magazine (December), the Author wrote an exclusive report headlined ‘Stacking the Odds’. It’s well worth a read and discusses both the validity of personal guarantees (PG’s), the lack of any central register and the fraudulent use of stacking, ergo the repeated issuance of PG’s by Directors to multiple suppliers and lenders in a commercial environment.

Credit Reference Agencies (CRA’s) used to hold such information in relation to PG’s in commercial transactions when linked to sole traders or partnership businesses but were forced in 1999 to separate consumer and commercial into two ‘discrete’ databases.

It’s my experience that PG’s in a commercial environment tend to be ultra-discrete. A business owner or Director, when not offended by a demand for PG’s prefers to have the arrangement private and indeed suppliers or lenders themselves feel obligated not to share the fact that such PG’s are present, either on a permanent or short term basis. While there is merit in asking CRA’s to manage PG’s issued I can’t see this being too effective given the nuances of those holding such PG’s and it would take quite some effort to maintain such databases accurately.

From a commercial supplier perspective, I was never a big fan of PG’s to secure debt as they invariably came with significant risks attached even though personal assets were evident. Quite some research was always needed to validate ownership of assets and indeed their true value and this often forced me to limit PG’s to lower level risk. Within the Technology distribution business for example, I rarely sought PG’s for more than 50K and within SMB clients this dropped to 25K.

I recall my first ever demand for a PG back in the mid-seventies when managing Credit for a division of the Rank Organisation. The rising popularity of VHS Video cassettes meant a growing number of retail operations, one of which was a relatively modest business in Central London called Carnaby Wholesale and which had recently come under new ownership. The demand, and it was a strong one was for a credit line of 75K but company financials were weak and those of its new parent were not much better, the only asset essentially being a Rolls Royce vehicle. The man behind new ownership was however well known nationally (The King of Soho) and had successful interests in Adult publications, Clubs as well as property investment.

I figured 75K was a reasonable risk and followed through with the PG while others felt his name and involvement was good enough.

Some 4-6 months later, the business collapsed, moving to insolvency. Retention of Title dropped our exposure to around 50K and we naturally called in the PG. It was paid in full within a month. Others, who relied simply on the investor’s business reputation, suffered loss.

In the ensuing thirty five years of managing credit and risk, I only ever resorted to personal guarantees on a dozen or so occasions and only called upon one other, again successful and for a lower value. Parent and cross company guarantees were to me, far more effective.

On one occasion, I was asked by a CEO to consider a Personal Guarantee of 200K as risk was too great and credit insurance was not available. His argument went along the lines of ‘he’s got loads of money, drives a Bentley, lives in a huge mansion and has varied business interests’. ‘He’d embarrass himself if he went bust’ was the final retort.

I insisted it was madness but he decided to approve the risk to 100k with a guarantee, against my advice.

The inevitable happened, the business collapsed within months, the guarantee was called and lo and behold, he’d issued these to multiple suppliers. He subsequently filed for bankruptcy with the only asset listed being a Rolex watch; everything else, the mansion, the cars, property and cash were all in the name of his wife and we ended up writing off just short of 80K.

Nice one to close with. I requested and was granted joint and several guarantees from two directors of a then SMB Reseller in Essex for an amount of 50K. This was to manage a series of at least three major deals over a period of months but the guarantee remained in place, buried within paperwork. It had been misfiled and some years later I came across it. The guarantee was not intended to be a permanent one but the issuers had forgotten they carried this liability and were relieved when I finally handed them the original guarantee they’d signed some 7 years earlier.

A primary responsibility of those demanding PG’s is to initially carry out the relevant due diligence, continued review for the duration of the PG’s and accurate or timely cancellation of these when circumstances warrant it.

As it is unlikely any Companies House or other central register will carry PG information, CRA’s will be at the mercy of lenders and suppliers feeding them the required details accurately in order to make such information available to users and that is a tricky thing to achieve given privacy aspects.

 


Tuesday 27 October 2020

Increase your Value

 


I admit I was fortunate in my working life. I worked for businesses that recognised the real value add of Credit and where any emphasis were needed to achieve this, I made sure the case was fully known and understood. I also found myself working with superb responsive and resourceful people.

For anyone engaged in Credit Management, recognition, reward and progression remains the ultimate goal, or it should be. This is not however achieved through delivery of expectation alone; it requires intelligent and valuable contributions beyond simple order to cash and bad debt thresholds. If one simply delivers to expectation month in month out, the measure of this delivery diminishes and your value in turn to the Company remains constant and in the eyes of senior management, it becomes dull. 

Working correctly internally and externally should not be confined solely to delivering on expectation but must deliver to all those participants an additional element of value add that helps them achieve more too.

Whether you have full control of terms agreed and credit risk or not, once you have achieved optimised collection and bad debt levels (which cannot be improved) there is a need to deliver beyond this to increase your own value to a business. I’ve known far too many really good Credit people despatched to redundancy pathways or sudden lay-off because they have simply delivered to expectation.

Adding value can be so easy.

Databases and ERP platforms used to deliver on expectation carry with them enormous amounts of information that is on the whole vastly underused and standard recognised Credit Management reporting is often not modified or interrogated consistently enough. Get into the habit of doing this to ensure your reports retain interest.

Many Corporate structures still work with independent divisional silos; Sales, Marketing, Product Management, Warehousing, Transportation, HR and Finance. Each work with tools at their disposal but do not overlay or determine if any of the information at their disposal can be of use to others.

I once recall providing a Sales Manager with a detailed report of information on clients his team sold to and those they did not. It included swings in gross margin generation, Bad debt record, dispute values, unused credit and delivery cost recovery. It even included an aged debtor report on his team’s accounts. His answer was ‘I don’t have time as I’m too busy filling in spreadsheets on sales targets’. Mercifully, not all Sales Managers were like this. Many welcomed this help in identifying issues and problems as well as the opportunities to sell more and better.

A simple routine like a monthly schedule of aged debt with credit lines can be substantially enhanced through addition of just a handful of additional elements, for example cumulative sales, year to date sales, credit terms, gross margin achieved. It can increase enhancement still further through segmentation and interrogation, by sales group or salesman, debt banding, product group, credit line and many others. It is this type of interrogation that so often highlights issues and opportunities that are so often missed through standard delivery.

The opportunity of adding value to Credit Management become limitless once you remove the straight-jacket of ‘conformity’ and it’s this that will lead to recognition and real value. If the opportunity is not there, then fight; argue its case and value in presenting real time information and statistics.

Credit Management works with everyone both internally and externally in delivering what is expected in order to cash and debt management. I consider it criminal if it does not work with those same areas in delivering tangible measurable value add beyond this.

I said I was fortunate, and I was but it did not come naturally. I made sure I gave more than was expected and pushed the boundaries of credit when there was yield and benefit to do so.

I recall a case in which a massive phased order was due to arrive from a client in one of our European businesses and which necessitated a potential short term exposure of up to 5m on the buyer.  Our Corporate EMEA risk authorisations required approval at this level from our Group CEO based in the USA and rushed emails were flying to and fro in an effort to obtain approval. The Group CEO response is one I treasured for some time. It was just one line in an email that said ‘What’s Eddie’s opinion of the deal and risk, I’ll go along with whatever he advises’.

When you’re never over-ridden on credit or term decisions, your foundation in building value add is secure; it’s a wonderful secure platform to stand on.


Sunday 15 March 2020

Recognition and reward requires more than just successful delivery of what is expected.


The concept or thought of Credit Management as a business tool and not simply an adjunct of finance is not new or misplaced but its transition to full mode recognition has been painfully slow. It has worked in some cases but only to a degree and the reason I suspect, is reluctance by those in Credit Management to push the boat out hard and blow their own trumpet. It certainly does not aid matters when corporate business retains divisional silo’s rigid and impregnable and is less than willing to allow freedom of expression.

Salary levels have improved considerably, more so at the top end driven by the Chartered status of the Institute of Credit Management and its leadership of the past 15 years but I still worry that many fall back on tried and tested ways to improve image and value by working on delivery of basics and not real tangible value add.

Delivering 100% of your job specification will not win you the prize

Far too many inappropriately look upon delivering excellence in existing job specification requirements as adding value; it’s not, it’s simply a requirement of what is expected and will certainly not get you noticed or ‘valued’ across all areas of your business, your peers, clients or your industry. You’ll be applauded in many cases, certainly, but you will not be seen as anything special or extraordinary.

  •          Improve DSO?
  •          Streamline efficiency in order to cash?
  •          Mitigate and manage Bad Debt?
  •          Train and recruit staff and keep them skilled and happy?
  •          Reduce incidence of delinquency and disputed debt?
  •          Work with Sales in maximising debt recovery and mitigating risk?
  •          Use supporting tools and operating systems?
  •          Select business reporting agencies, credit insurers and third party collectors?
  •          Manage departmental budgets and costs?
  •          Work with clients to maximise receipts?
  •          Provide accurate data management flow?
  •          Manage a shared service centre?
  •          Delegate responsibilities correctly and efficiently?
  •          Communicate effectively?

None of the above are value add. They are a matter of requirement irrespective of any extra-curricular activity engaged in while striving to deliver all this to a high degree and consistently.


So, what is it that will get you noticed and valued more than just being appreciated?

Quite simply, it’s using all the tools you have at your disposal coupled with the vast amount of information you work with on a daily basis or have easy access to in order to accelerate business information and performance of the company you work for and not singularly the Credit Management function wherein you sit. 
It’s about getting yourself recognised outside the boundary of Credit or departmental silo, engaging with all areas of your business, more importantly your clients and their activity and the industry in which you work in.

What’s the best way to begin engagement in this? Meet your principal or valued new clients, indeed visit as many as you can and often. You’ll be absolutely astonished at how many doors this opens in terms of achieving real value add and recognition.

I recall as a Credit Manager sitting in on a high level client meeting with our CEO who during the course of negotiation and discussion turned to our client and said ‘What is it about us that you like? Why do you place so much of your business with us’? The client Managing Director and owner looked him straight in the eye (while touching my shoulder) and said ‘Because of this man here, he read us well, understood what we were about and has supported us all the way, through good and difficult times’. I felt ten feet tall and probably looked it too.

When such clients and others call you and share confidential plans to grow through acquisition, ask your opinion, share in confidence names of those considered and ask you to suggest other suitable targets, you know you are providing something on behalf of your company that no other competitor does. Supplier/client relationships only remain strong through continuity, trust, understanding and a willingness to support respective ambitions or plans for growth and the greater the touch points between you, the more solid the relationship becomes.

When events such as this are repeated over and over again your stature and influence grows; it allows you to engage far more widely in business development and your ideas, views and opinions gain considerable traction and acceptance. 
The additional flow of information you provide can all add to this new found freedom of expression. You begin to be approached for advice or opinion on business direction, (often by clients themselves), industry news or projected future plans which all further enhance the tangible value add beyond your job specification. Sure, it requires additional effort and often your own time but the rewards are substantial and what’s more, you guarantee job satisfaction and consistent results delivery.

Imagine working with a mission statement that is along these lines as opposed to traditional and somewhat staid examples:-

“To provide the Company and its Clients a quality Credit Management service designed to create, expand, secure and support business opportunity and profit”


This was our mission statement and there is no doubt in my mind that it greatly influenced Corporate and Credit attitudes in delivering tangible value add. Just doing your job exceptionally well only serves to limit such contribution.

In order to be successful, Credit Management must offer a competitive, selling, commercial and financial advantage. It’s in a terrific position to establish customer needs and help focus activities of the company in providing these at a profit.

Stretch your arms and punch above your weight.

MTIC Fraud


MTIC Fraud – an unwelcome and costly business activity.

Missing Trader Intra-Community fraud or VAT fraud more generally has been evident in channels since the early nineties and remains a real headache for both HMRC and indeed businesses that may unwittingly find themselves involved in it. This is primarily because the traditional routes to market prior to 1990 were more rigid in construction and less prone to such activity. Manufacturers would supply Distributors and they in turn would supply Resellers who sold product onto end users.
This path to market however became convoluted and far more complex with the addition of brokers, wholesalers, OEM’s and sub distributors resulting in current  blurring lines of purchase and supply across all major players. In the Reseller space a lack of warehousing availability means the convenience having product shipped directly by a supplier to the customer remains a common theme.

Today, Vendors supply more than just Distributors and they in turn, as do others further in the chain, buy and sell from and to, differing channel partners.

The amounts the UK treasury and indeed those of other nations lose each year are vast. Europol estimates it costs revenue authorities as much as 60bn annually.

The most common fraud is MTIC fraud, a frequently sophisticated exercise that exploits varying VAT rules across EU states. Organised criminals create a complex structure of ‘linked’ companies in several countries, sometimes extending into the Middle East. The aim is to take advantage of national and international VAT revenue accounting processes and laxity of control in routes to market and trading or shipping methods. It’s an extremely lucrative way for organised crime to launder dirty money and make money doing so. At some point in that chain, a reputable and unsuspecting partner is introduced and they are generally the ones to face the pain once those before and after the chain collapse or disappear.

It works by using the legislation that allows cross border trade to be VAT free, with VAT only applying to domestic sales. The creation of companies across countries by those engaged in VAT fraud allows for the movement of goods cross border, the charging of VAT domestically followed by a default when those inter-connected traders go missing or fold before paying the VAT levied and received by them domestically.

Carousel fraud is a little more complex but follows similar lines in that product is imported VAT free, sold on domestically once or several times and exported again, ending up with the originator. Again, the default and gain arises when one or more of those domestic traders across countries go missing. In such cases, it’s been known there is sometimes no physical movement of product, simply a paper trail or the same product  moved round in circles multiple times (hence the carousel).

Links between companies working this fraud are often disguised but the one sure fire give-away is that many do not trade for long, folding or disappearing in less than a year. They are invariably newly incorporated, have seen recent changes in ownership and lack solid financials. To mask this, they often use a ‘patsy’, a legitimate domestic business through which the supply chain can be disguised.  The lure of a great deal at no risk, substantial revenue opportunity and favourable margin often cloud the decision, as does a general lack of awareness of MTIC Fraud within buying and selling departments, senior management and business owners. 
Unwittingly being drawn into the fraud chain is a real risk, more so If the deal comes from suggested ‘reputable ‘ sources, people that previously worked for major well- known companies, new sales or buying people employed or indeed if the introducer to the contact is someone it’s felt can be trusted.

HMRC, to be fair does try; it visits newly formed companies, especially those that import and export and provides information on MTIC and hands such forms as VAT Notice 726 on Joint and Several Liability for unpaid VAT. It also undertakes regular checks of company VAT reports but none of these steps are enough to really drive home the message. It needs to ensure businesses have more detailed knowledge of MTIC Fraud and should be far more pro-active in shutting down or de-registering VAT fraudsters much earlier than currently. It’s often the case that by the time they move on known or suspected fraudsters, those unwittingly drawn in may have already taken a hit and perpetrators may well have drawn others in.

Distribution certainly is aware of MTIC fraud and many engage correctly with specialist MTIC teams employed to shield the business. Resellers on the other hand were never adequately prepared for the resultant shift of this type of fraud further down the channel, much more so given the move away from traditional warehousing and stock holding to direct shipments and the inclusion of logistic supply chain depots.

Sales people and business owners are keen to sell and new buyers brought into the business or new contacts made at trade shows are warmly welcomed when they bring with them ready made or seemingly risk free deals, more new clients and greater business volume. Checks, if any are applied are standard and left to their Accounting and Credit Risk functions.

There is an attitude that if goods are sourced from a reputable supplier, the onward sale to overseas buyers with payment up front is a sound transaction. It may be nothing of the kind if the buyer is a shell company which until six months ago had a Standard Industry Classification (SIC) of watch making and jewellery but suddenly trades in electronics and telecommunications and is run by an 84 year old National of another country.

Checking and validating your supplier/client demands much more than just a business report, credit rating, VAT registration confirmation or Chamber of Commerce documentation or website verifications. They are important of course but it’s really how you combine all this and other information and interrogate or question it that makes the difference. This is equally important in any domestic sale.

Bluntly, if a relatively new business or one that has weak financials is seemingly willing and capable of pre-paying you considerable sums of money, you have to ask yourself the question - why and how?

HMRC has useful tools and guides to follow in order to avoid involvement in VAT fraud which for some years has come with Joint and Several Liability but not in a ‘language’ business owners or accountants fully understand. Leaflets and guides are fine but sadly they’re read and filed for future reference. There needs to be HMRC dialogue and training and ongoing refresher meetings instead of headline warning triggers to watch out for. Business owners after all do not always have a handle on every deal and transaction and sales people are paid to sell. Buyers are not trained to validate or be watchful of new supply chains.

What to watch out for….

Ø  Supplier and customer are the result of ‘introductions’ new sales people employed or a new buyer within existing supplier
Ø  Supplier provides the customer and assures risk free trade with pre-payment
Ø  Supplier suggests you take the deal and export as they cannot fund the VAT timing differential
Ø  Supply chain guarantees fixed gross margin percentage on deals
Ø  Supplier will not reveal source of supply
Ø  Supplier or their supplier if revealed will generally be newly incorporated, lacking financials or may have experienced a change in ownership
Ø  Supplier insists in invoicing you in Euro domestically when goods are for export
Ø  Supplier suggest you use their logistics company for onward shipment
Ø  Supplier refuses to allow you to inspect, touch or feel the product
Ø  Shipment to customer via logistics is not to the same country as that of the customer
Ø  Customer information is sketchy, weak and often masked with foreign ownership
Ø  Given information gathered on customer, there is no way you can justify their ability to pre-pay large sums
Ø  Supply chain and customer websites are basic and lacking in real information
Ø  Check that incoming prepayment matches the bank details of the customer
Ø  Supplier offers you gross margins higher than those they achieve
Ø  Goods of non UK specification are offered for supply in the UK
Ø  There appears to be no recourse if goods are not as described (given prepayment)
Ø  Supplier asks you buy and sell product you are not normally known to engage in
Ø  Supplier asks you to pay third parties or off-shore bank accounts
Ø  Supplier refers you to customer that is willing to buy products in the same quantity and specification
Ø  Formal contractual arrangements are often lacking
Ø  Supplier/Customer is newly incorporated (usually in last two years), lacks financials and may fail to file or publish them. Common theme is to cease trade before year end, moving activity to another prepared company.
Ø  Recent change in ownership of supply chain and/or customer
Ø  Customer is seen to have massive, sudden and unexpected increase in sales growth, often in exports

In all cases of HMRC withheld VAT, they will consider what precautions and actions you have taken to mitigate or steer clear of such trade. Their guidelines are just that and are certainly not exhaustive. They will check what due diligence you applied to trade and what actions if any you took to cease activity once you knew deals were dubious or questionable.

No business is immune from accidental involvement as known channel names have often cropped up in HMRC case lists. The cost to a business of withheld VAT can be substantial and often ends in business insolvency.

It’s vital Resellers and others in the channel not only prepare themselves well but demonstrate real intent in tackling this problem head-on. It is not that hard to achieve with the right understanding, correct process and order to cash workflow guidelines. Industry bodies could and should do far more to educate and inform the channel of the risk.
The fraud is sophisticated, extremely knowledgeable of channel routes and business practice; it can easily coerce unsuspecting and unprepared Resellers.


MTIC VAT Fraud



Is enough really done by Companies and HMRC to counter and nullify this type of activity? In my view, not quite enough is done by either but HMRC could and should do much more.
Since 2003, HMRC has raised its game; it produced a leaflet on “how to spot missing trader VAT fraud” and followed with sending company’s Form 726 Notices on Joint and Several Liability for unpaid VAT but this is not sufficient enough to ensure business owners are adequately equipped to tackle this type of activity or be properly warned of the consequences.

The problem really centres on the checklist Companies are asked to consider in making sure of the integrity of a supply chain and the legitimacy of customers and suppliers. Many of these are standard and will apply to legitimate business activity and it is how a business owner is supposed to make a judgement on sudden noted new business or increased business using such checklists that makes the current advice fall short. Giving companies four, five or six copies of Form 726 over a period of time is an appalling way of attempting to control MTIC and VAT Fraud. It’s fair to say this slow and cumbersome approach of repetitive ‘chucking’ of forms, visits and interviews results is far too many MTIC traders not being VAT de-registered early enough to cut the chain.

Section 6 of Form 726 is titled ‘Dealing with other businesses, how to make sure the integrity of your supply chain’. It goes on to list bullet point sub headings in a question format that does not in essence warn companies precisely what is indicative of VAT fraud transactions; they’re answerable with either a yes or a no but there is nothing there to suggest what a business should do in the event of either too many yes or no answers. Is it risky business or isn’t it?

The same format of questioned bullet point’s cover subsection 2 of Commercial viability of the transaction but with no guidance on what to do given answers.
Ditto section 3 that covers the Viability of the goods as described by your supplier but questions that prompt yes or no answers are worth nothing as a guide unless one is prompted to either talk to or refer back to HMRC any concern and nowhere in this Form 726 notice is any contact point given for recipients of this notice to call with any concern or question. It’s really nothing more than a guidance note instead of a definitive informative document that encourages participation and feed-back.

If the aim is to seriously warn businesses of the consequences then Form 726 needs to be an instructional guide not a yes/no questionnaire. Let’s assume a re-draft looks like this:-

Section 1)
  •        You must research and validate your customers and suppliers trade in product
  •         Beware of buyers or sellers you are not familiar with and are seemingly able to  immediately trade in large quantities and specifications
  •        Beware of suppliers or buyers that mutually introduce themselves and are able to trade immediately to required levels, quantities and specifications especially on a pre-paid basis
  •        Question any deal that provides no commercial risk to you, for example one that allows you to be paid before paying the supplier, especially if the supplier would be in no position to offer you open credit terms to such value given your company credit rating.
  •        Beware of repetitive trade or promised trade that guarantees you an assured fixed gross profit margin irrespective of timing, quantity or specification
  •        Avoid any transaction that requires you pay a third party or off-shore bank accounts
  •        Ensure goods are insured
  •        Ensure and evidence formal contractual arrangements irrespective of deal size
  •        Beware of any supplier or client recently incorporated that is seemingly offering to trade in significant quantities and values.
  •        Ensure the integrity of supply and question unusually low pricing


I now add a few more that should be included….

  •        Validate the authenticity of new business brought into your company by new sales or purchasing personnel
  •        Avoid any trade where a supplier asks you to export to a customer on their behalf as they cannot fund the VAT
  •        Always ensure supplier accreditation to sell product offered and seek information as to their source of supply if not so authorised
  •        Do not accept a UK domestic supplier invoice in Euro
  •        Ensure you control despatch or release of goods even if using the suppliers or customers logistics’ company
  •        Insist on ad hoc inspection of goods when exporting via logistics hubs
  •        Do not ship to a country other than that of the buyer irrespective of pre-payment
  •        Question the ability of any client to pre-pay large sums and verify bank accounts
  •        Ensure goods for sale in UK are of UK specification
  •        Beware of recent changes in ownership or trading activity of suppliers and customers
  •        Beware of a customer’s sudden increases in revenue, more so when this is largely exports.
  •        Avoid or be watchful of a supplier that offers you a higher gross margin than they achieve.
  •        Be alert to being asked to suddenly engage in trade of products you normally do not buy or sell

Section 2)      

  • Ensure there is a market and appetite for the type of goods traded and question deals involving end of line product and compare pricing structures
  • Ensure pricing is not likely to be affected should the duration of the supply chain be extended
  • Show that proper commercial practice has been applied in negotiating prices by showing for example you have considered other suppliers availability and pricing
  • Avoid third party payments unless they legally secured and formally agreed
  • Validate and evidence why credit terms are offered or pre-payment is required

Section 3)

  •        Ensure goods purchased and supplied actually exist. Do not rely simply on a buyer not complaining about shortages or quality or product specification
  •        Be very careful of entering a supply chain for product you do not normally purchase
  •        Ensure all goods are as described, in good condition, not damaged and ensure inspection
  •        Question any deal that looks abnormally large compared to others your company normally engages in
  •        Do not export goods that are destined or intended for the UK market
  •        Ensure your supplier is able to provide you with IMEI or other serial numbers and avoid trade if they cannot
  •        Ensure there is no recourse to you if the goods are not as described.
  •        Retain all commercial transaction documentation

Sectionction 6.2 bullet points half a dozen or so actions to take in checking proposed business partners which arose out of a 2003 consultation document but again is not as clear and concise as it should be and I suggest the following;
  •        Obtain a copy of VAT Registration document and validate VAT registration numbers (including those in Europe) with HMRC (VIES)
  •        Request copy of any overseas Chamber of Commerce documentation
  •        Provide all new clients with an Account Application form to be signed by a duly authorised person and agree Terms and Conditions
  •        Obtain full business reports and credit checks on new clients/suppliers from an independent third party provider
  •        Validate and consider applicants website in terms of quality and nature of trade
  •        Ensure bank details provided match any suggested or incoming payments
  •        Google search location to ensure business premises match nature of the proposed business activity. Google street view is a great way of looking at a proposed client location and premises
  •        Once trade commences, be watchful of increasing volumes and ensure you engage in daily VAT validation reports should this be the case
  •        If any question of doubt persists, contact HMRC for further validation

Form 726 would carry more leverage and weight if this type of ‘instructional’ format were to be used as opposed to the current question tick box list with no onward advice or suggested course of action.

Business owners handed the current Form 726 or receiving it via mail will either quickly read certain sections or simply pass the form to their accounting or finance functions, having reached perhaps a conclusion that given the nature of their business, they’re unlikely to find themselves embroiled in such MTIC activity.

HMRC guidance therefore today is simply a case of ‘here are some things to watch out for, we’re not going to tell you exactly how to behave from a commercial perspective but we may refuse to repay you as some point in the future if we think you’ve not applied yourself correctly’.

It should be far more punchy and direct in what it expects business owners and senior management must do. It should also facilitate a contact point within HMRC that would allow businesses to call and validate new or unusual trade approaches. Imagine what a wealth of additional information this would provide HMRC, how much earlier the intervention and how reduced the loss to the public purse would be.