ECSH82815 - Sanctions for non-compliance: financial penalties: financial penalties framework: use of gross profit to calculate penalties for contraventions of the Money Laundering Regulations (MLRs)

Background

As part of the penalty framework, we use a business’s gross profit as an element of calculating Type 1 (scale charge) and Type 2 (trading while unregistered) penalties. This penalty cap ensures that the starting penalty is not disproportionately high compared to the gross profit of the business.  

In order to calculate the gross profit, for the purposes of the penalty calculation, the most recent annual accounts available at the time decision maker (DM) decides to issue a penalty should be used. Note: The penalty cap meets the requirement to consider the financial strength of the person being sanctioned (Reg 83(1)(c) of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017)), and therefore the starting point of the penalty should be the gross profit of the business as a whole. If this results in a penalty that is disproportionate: for example, because the level and risk associated with MLR activity is a very small portion of the overall business activity, HMRC may consider reducing this penalty to reflect that.

Accounting standards do not define gross profit. However, company law and the Appendix to Section 5 of the UK Financial Reporting Standards (FRS 102) include a profit and loss format that shows turnover less cost of sales equals gross profit. UK Generally Accepted Accounting Practice (GAAP) does not define cost of sales but defines turnover as ‘The amounts derived from the provision of goods and services’ [after discounts and taxes] (Appendix I Glossary FRS 105, FRS 102). 

For the purposes of calculating Type 1 (scale charge) and Type 2 (trading while unregistered) penalties for breaches of the MLR 2017, HMRC’s policy is to exceptionally accept inclusion of certain elements as a cost of sales. We do this both to reduce the administrative burden of applying the framework, and to ensure that the penalty is proportionate.

Exceptional basis

Gross profit is normally calculated as set out above. Exceptionally for the purposes of calculating MLR penalties only, HMRC accepts that, as they are incurred by the business for running its day-to-day operations, the following may be deducted to determine the gross profit figure for the purposes of calculating penalties under the MLR 2017.

This is not a one size fits all list and the nature of the business activity needs to be considered especially where we describe something as ‘essential’.

  • Administration costs for example: postage and stationery and general overheads involved in running the day-to-day business activities
  • Advertising including anything designed to promote the business in print, broadcast media, online or by phone/text, with a view to increasing sales
  • Commission including commission paid to staff not otherwise included in salaries and commission incurred by the business in carrying out its business activity
  • Licences, registrations, or subscriptions essential to carry out the business’s activity such as fees to trade associations or professional bodies, or software licenses

  • Office / premises overheads for example: water, rent (including renting temporary space), lease, rates, electricity, gas and telecoms/internet
     
  • Professional fees for example: accountancy and legal fees incurred by the business as would normally be allowed for tax purposes see gov.uk

  • Home office use - as allowable by normal HMRC rules see gov.uk
  • Salaries and related National Insurance and pensions costs including directors’ remuneration, however, dividends paid to shareholders (whether directors or not) do not relate to the day-to-day operations of the business and are not considered to be a direct cost. Shareholders dividends must not be deducted.
  • Travel, transport and subsistence as would normally be allowed for tax purposes paid to an employee, director or incurred by a sole trader see gov.uk

Further HMRC internal guidance can be found here.

Accuracy and compliance checks

Companies are generally not required to calculate gross profit for other purposes and so are often not overly concerned with the classification of costs between cost of sales (in arriving at gross profit) and distribution or administration costs (recognised after gross profit) when calculating gross profit in the accounts submitted to HMRC.

As such, we give fair warning in our pre penalty notice that we will be using this to calculate the penalty. We should generally allow a business to restate its gross profit to us as part of this process.

However, we should query the credibility where HMRC has concerns with the revised figures provided; and HMRC will only look behind the calculation where it believes, on the basis of evidence, that there is a clear error in the figures or has a genuine suspicion (which can be evidenced) that the figures are not being submitted in good faith.