MLR1PP15090 - Type 2 penalties (carrying out relevant activity 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 2017 Regulations), the penalty will need to be apportioned between the 2007 and 2017 Regulations. Only the 2017 penalty can be published.

Under the new framework, there are three steps necessary to calculate the amount of the penalty. These are:

Step 1

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, nine 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.

If it is impossible to verify the total period of time the business has been trading but it can be proven that relevant activity has been undertaken, the business must only be charged based upon the period of time it can be proven the business has been trading. 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 1 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.

Calculating the penalty based upon number of trading periods the business has been unregistered will be the starting penalty.

Step 2

The next stage is to look at the business’s gross profit, based upon relevant activity undertaken. For example, the business conducts relevant activity within a shop, selling goods, the shop gross profit should not be taken into consideration, rather the gross profit only from the relevant activity. The figure required is the most recent annual gross profit as penalties will be capped depending upon the amount of this figure.

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

  • £0 - £15,000
  • £15,001 - £50,000
  • £50,001 - £100,000
  • £100,001 - £250,000
  • £250,001 - £500,000
  • £500,001 - £1 million

Whatever category above the business is within, the penalty cap will be 10% of the upper limit of the range. For example, where a business has a £65,000 annual gross profit, the business is within the £50,001 - £100,000 range. Therefore, the penalty cap is £10,000 (i.e. 10% of the top of this band which equals 10% of £100,000).

Similarly, 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 on a loss, the business should be categorised within the first gross profit range £0 - £15,000.

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

Once the penalty cap is identified in step 2, if this is lower than the value calculated in step 1, the penalty value will be lowered to the penalty cap value.

Step 3

The next stage is only applicable where the business has been trading without being registered for in excess of 12 months. In this eventuality, there is a supplementary £200 on top of the cap for each trading period (see definition above). For example, suppose that a business has been trading whilst unregistered for 21 months. This equates to seven trading periods in total, three periods beyond 12 months. Therefore, for a business with profits of £22,000 (falling into the £15,001 to £50,000 bracket) the penalty would be:

£5,000 + (£200 x 7) = £6,400

Remember, the above only produces the starting penalty. Just as with type (1) and type (3) penalties, the initial figure is subject to abatements. For type (2) penalties, abatements of 50% of the starting penalty value are available for businesses who voluntarily disclose details of trading whilst unregistered.

Finally, the resulting figure after any relevant abatements will also attract a 25% discount where the payment is made within 30 days of the penalty notice being issued. See MLR1PP15100. This is also the case for all penalties under type (1) and type (3).