ECSH82795 - Sanctions for non-compliance: financial penalties: financial penalties framework: type 2 (trading whilst unregistered)

Type 2 penalties relate to businesses that are conducting relevant activity whilst unregistered.

It is important to note that if a business is found to be undertaking relevant activity, whilst unregistered and the relevant activity predates 26 June 2017 (implementation of The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017), the penalty will need to be apportioned between the Money Laundering Regulations 2007 (MLR 2007) and MLR 2017. Only the MLR 2017 penalty can be published.

Regulation 110(2) MLR 2017 makes clear that contraventions of the MLR 2007, where the conduct began before the MLR 2017 came into force, should be dealt with under MLR 2007.

The business is obligated to register under both MLR 2007 and MLR 2017. Therefore, where a business has been trading whilst unregistered prior to 26 June 2017 and continues to do so after that date, HMRC considers that this conduct can properly be described as two separate contraventions for which the business can be penalised: the business carried out a relevant activity having failed to register under MLR 2007, and then again under MLR 2017. The failure to register under MLR 2017 was conduct that began after MLR 2017 came into force and therefore does not fall within regulation 110 MLR 2017. HMRC therefore considers it has the power to issue separate penalties for the periods of trading whilst unregistered before, and after MLR 2017 came into force of MLR 2017 on 26 June 2017.

The date each sector was brought into HMRC’s supervisory scope of the current and previous money laundering regulations can be found at ECSH82796.

There are three steps to calculate the starting amount for the type 2 (trading whilst unregistered) penalty set out below. 

Once the starting penalty is calculated, the decision maker (DM) is required to consider whether the reduction for disclosure should be applied and whether the penalty calculated is appropriate in the circumstances of the case and may make adjustments as necessary. The outcome of the appropriateness review can include increasing or reducing the starting penalty.


Step 1 – Calculate the starting penalty

The first step is to calculate, in absolute terms, for how long the business has been trading whilst unregistered. This length of time then needs to be converted to the number of ‘trading periods’ where a ‘trading period’ is defined as three months or any part thereof. So, for example, 9 months trading whilst unregistered is three trading periods. Similarly, 19 months and two weeks equates to seven trading periods. This is because 18 months would constitute six trading periods whilst the remaining one month and two weeks is the seventh.

The business must only be charged based upon the period of time it can be proven the business has been trading whilst unregistered. If no specific period of time can be verified, but relevant activity has been undertaken, the penalty must be calculated based upon the business trading for one three-month period only.

The starting penalty will be calculated as £5,000 for each trading period, with a maximum of 20 trading periods. Therefore, the maximum starting penalty is £100,000.

Step 2 – Gross profit considerations  

The next step is to look at the business’s gross profit. Doing so ensures that the starting penalty is not disproportionately high compared to the gross profit of the business. The purpose of this step is the meet the requirements within regulation 83(1)( c) MLR 2017 to consider the financial strength of the business.  

 The gross profit (up to £1,000,000) is categorised into the following bands:

Gross profit bands

Penalty calculation

Amount

£0 to £15,000

£15,000 x 10% =

£1,500

£15,001 to £50,000

£50,000 x 10% =

£5,000

£50,001 to £100,000

£100,000 x 10% =

£10,000

£100,001 to £250,000

£250,000 x 10% =

£25,000

£250,001 to £500,000

£500,000 x 10% =

£50,000

£500,001 to £1 million

£1,000,000 x 10% =

£100,000

Whatever band above the business’s gross profit is within, the penalty amount will be 10% of the upper limit of the range, unless there are other factors to consider. 

Example 1 - Where a business has a £65,000 annual gross profit, the business is within the £50,001 - £100,000 range. Therefore, the penalty starting point is £10,000.

Example 2 - If a business had an annual gross profit of £22,000 then the cap would be £5,000. This is because £22,000 falls into the £15,000 to £50,000 range and 10% of £50,000 equals £5,000. 

If the gross profit hasn’t been/cannot be identified or the business is running at a loss, the business should be categorised within the first gross profit band £0 - £15,000.  

It is important to note that if the gross profit is above £1,000,000 then the maximum penalty is £100,000.  

The lower of the figures calculated in step 1 and step 2 is the starting penalty. This may be increased or decreased once any disclosure reduction is applied and after the appropriateness review is undertaken.

Further guidance on gross profit can be found at ECSH82815.

Step 3 – Supplementary charge  

The next step is only applicable where the business has been trading whilst unregistered in excess of 12 months. In this case, there is a supplementary £200 charge applied for each trading period.

For example, where a business has been trading whilst unregistered for 21 months. This equates to seven trading periods in total, three periods beyond 12 months. For a business with a gross profit of £22,000 (falling into the £15,001 to £50,000 bracket) the penalty would be   

£5,000 + (£200 x 7) = £6,400  

The above only produces the starting penalty. It is important to note that the maximum starting penalty is £100,000.

Penalty reduction

For type 2 penalties, reductions of 50% of the starting penalty value are applied for businesses who have disclosed the contravention (trading whilst unregistered) without being prompted. Where a business applies to register without being prompted, this is considered an unprompted disclosure and the 50% reduction will be applied.

Appropriateness review

Once the DM has arrived at a penalty figure, after completing steps 1 to 3 above and applied any disclosure reduction due, they must then consider whether the penalty figure is appropriate.

The appropriateness review is the documented consideration that DMs must make, explaining how the penalty is appropriate and why the amount being imposed is appropriate. All of the relevant factors of the case must therefore be taken into account and documented within the appropriateness review, along with consideration of the relevant factors within regulation 83(1) MLR 2017. If the DM considers the penalty amount is not appropriate, then they should adjust the amount of the penalty accordingly (see ECSH85650 and ECSH82785 for details of what to consider when undertaking the appropriateness review).

 (This content has been withheld because of exemptions in the Freedom of Information Act 2000)


(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

Apportionment of the penalty

Once the penalty has been calculated, where the trading whilst unregistered period being penalised falls across MLR 2007 and MLR 2017 the amount will need to be apportioned in order to calculate the penalty to be imposed under MLR 2007 and MLR 2017.

For example, an unprompted application was received from a business 28 January 2021. The business should have registered with HMRC when it started undertaking relevant activity on 28 January 2016. The penalty amount calculated, taking into account all the facts of the case, is £52,000. The period being penalised is 28 January 2016 to 27 January 2021. As part of this period falls under MLR 2007, the amount will need to be apportioned. This is done as follows

  • 28 January 2016 to 27 January 2021 = 60 months
  • 28 January 2016 to 25 June 2017 = 17 months (MLR 2007)
  • 26 June 2017 to 27 January 2021 = 43 months (MLR 2017)
  • £52,000 x 17/60 = £14,733 – this is the penalty amount to be imposed under MLR 2007
  • £52,000 x 43/60 = £37,267 – this is the penalty amount to be imposed under MLR 2017 and will be published
  • £14,733 + £37,267 = £52,000

Prompt payment

If the penalty is paid within 30 days of the date of the penalty notice, an early payment reduction is applied. The early payment reduction is 25% of the penalty amount. The penalty administration charge is not subject to the early payment reduction.