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 current 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.

The gross profit figure used to calculate the penalty should be taken from the most recent annual accounts available at the time decision maker (DM) decides to issue a penalty. Note: The penalty cap meets the requirement to consider the financial strength of the person being sanctioned (Reg 83(1)(c)) 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). It is relatively straightforward to apply this definition in relation to the accounts of manufacturing or wholesale businesses. But in a service sector business, for accountancy purposes we would expect the cost of sales to be the costs incurred in making the sales. However, for the purposes of calculating Type 1 (scale charge) and Type 2 (trading while unregistered) penalties for breaches of the MLRs, 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 give customers the benefit of the doubt for the purpose of calculating the penalty.

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 included as cost of sales, for the purposes of calculating penalties under the 2017 MLRs.

  • Administration costs

for example, postage and stationery

  • Advertising
  • Licences and registrations
  • Office / premises overheads
  • Professional fees

for example, accountancy and legal fees incurred for business purposes

  • Salaries and related National Insurance and pensions costs including directors’ renumeration
  • Travel, transport and subsistence

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.