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HMRC internal manual

MLR1 Penalties Guidance

From
HM Revenue & Customs
Updated
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Penalties guidance: the MLR penalty process: Overview: Compliance Penalties Part 2

Once the total starting penalty has been calculated, by adding together the fixed starting penalty and the additional penalty as shown above, this leads on to the second part of the penalty calculation process, which is the calculation of the penalty cap.

Because we must ensure penalties are dissuasive but fair, the total starting penalty for compliance breaches is limited to a maximum or ‘capped’ starting penalty. This is calculated as 10% of the business’s gross profit from all business activity in the preceding 12 months. This penalty cap, ensures that the starting penalty is not disproportionately high compared to the gross profit of the business. For MSBs/HVDs this cap can never be less than the fixed starting penalty of £5000.

With ASPs/TCSPs/EABs however, for reasons of proportionality as given at MLR1PP2230 the penalty cap is not subject to a minimum sum of the fixed starting penalty (£5000), the penalty cap is simply 10% of the business’s gross profit.

Once the total starting penalty and the penalty cap have been worked out, the maximum penalty figure is always the lower of these two figures.

So for MSBs/HVDs the maximum penalty is always the lower of the total starting penalty (£5000 plus 20% of the culpable turnover) or the penalty cap (10% of the gross profit, subject to a minimum of £5000). Therefore, if the business’s gross profit is less than £50,000, there is no need to calculate a total starting penalty at all, as the maximum penalty automatically defaults to the fixed starting figure of £5000.

And for ASPs/TCSPs/EABs, the maximum penalty is always the lower of the total starting penalty (£5000 plus the scale charge) or the penalty cap (10% of the gross profit).