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As part of the penalty framework,ÌýHMRCÌýuse a business’s gross profit as an element of calculatingÌýtype 1 (scale charge) andÌýtype 2 (trading whilstÌýunregistered) penalties. Doing so ensures that the starting penalty is not disproportionately high compared to the gross profit of the business.  

In order toÌýcalculate the gross profit, for the purposes of the penalty calculation,Ìýthe decision maker (DM)Ìýshould useÌýthe most recent annual accounts available at thatÌýtime.Ìý

Note:ÌýThe use of gross profit meets the requirement to consider the financial strength of the person being sanctioned (as perÌýÌýofÌýThe 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 businessÌýas a whole. If this results in a penalty that is disproportionate,Ìýfor example,ÌýbecauseÌýthe level and risk associated withÌýsupervisedÌýactivity is:Ìý

Ìý Ìý (a)ÌýÌýÌýA very small portion of the overall business activity; or

Ìý Ìý (b)ÌýÌýÌýSo significant that a penalty based on the gross profit of the business would not be dissuasive, effective or proportionateÌýtoÌýthe scale of the breach,Ìý

HMRC may adjust the penalty to reflect thatÌý– seeÌýECSH85650Ìýfor more information on the appropriateness review.ÌýÌý

Accounting standards do not defineÌýwhatÌýgross profitÌýis. However, company law and the Appendix to Section 5 of the Ìý(FRS 102) include a profit and loss format that shows turnover,Ìýless cost of sales,Ìýequals 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). Ìý

For the purposes of calculatingÌýtype 1 (scale charge) andÌýtype 2 (trading whilstÌýunregistered) penalties for breaches ofÌýMLR 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.

Ìý

Exceptional basisÌý

Gross profit is normally calculated as set out above.ÌýExceptionally,Ìýfor the purposes of calculating MLR penalties only, HMRC accepts that,Ìýas they areÌýincurred by the business for running its day-to-day operations,Ìýthe followingÌýmay be deducted toÌýdetermineÌýthe gross profit figure for the purposes of calculating penalties underÌýtheÌýMLR 2017. The starting point forÌýdeterminingÌýthese expenses will usually be from the accounts provided or tax returns filed.  However, see the section below, accuracy and compliance checks, if there is any doubt or concern over the figures.Ìý

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

• Administration costs Ìý-Ìýfor example: postage,Ìýstationery and general overheads involved in running the day-to-day business activities.Ìý

• AdvertisingÌý-Ìýincluding anything designed to promote the business in print, broadcast media, online or by phone/text, with a view to increasing sales.Ìý

• °ä´Ç³¾³¾¾±²õ²õ¾±´Ç²Ô -Ìýincluding commission paid to staff,Ìýnot otherwise included in salaries,Ìýand commission incurred by the business in carrying out its business activity.Ìý

• Licences, registrations, or subscriptionsÌý-Ìýessential to carry out the business’s activity such as fees to trade associations,Ìýprofessional bodies, or software licenses.Ìý

• Office/premises overheadsÌý-for example: water, rent (including renting temporary space), lease, rates, electricity,ÌýgasÌýand telecoms/internet.  Ìý

• Professional feesÌý-Ìýfor example: accountancy and legal fees incurred by the business, as would normally be allowed for tax purposesÌý-Ìýsee 51²è¹Ý.Ìý

• Home office useÌý- anyÌýadditionalÌýcosts incurredÌýas a result ofÌýhaving to work at home.ÌýCosts cannot be claimed if you choose to work from home andÌýincludes whereÌýyourÌýemployees of the business have a contract that lets them work from homeÌýsome,Ìýorall ofÌýthe time.  Further information on the types of expenses that can be allowed can be found Ìý

• Salaries and related National Insurance and pensions costsÌý-Ìýincluding directors’ remuneration.ÌýHowever, 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.Ìý

• Travel, transport and subsistenceÌý-Ìýas would normally be allowed for tax purposes paid to an employee, director or incurred by a sole trader seeÌý51²è¹Ý.

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

Accuracy and complianceÌýinterventionsÌý

BusinessesÌýareÌýnotÌýgenerallyÌýrequired to calculate gross profit for otherÌýpurposes,ÌýandÌýsoÌýare 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 accountsÌýsubmittedÌýto HMRC.Ìý

HMRCÌýgive fair warningÌýinÌýthe majority ofÌýcases by providing a pre-penalty notice, whichÌýclearly setsÌýout how we have arrivedÌýat the figure used for gross profitÌýwhen applying the penalty framework, to calculate the penalty. If the business considers our calculation is incorrect, itÌýhas the opportunity toÌýrestate its gross profitÌýas part of this process.  We must consider this before issuing the penalty notice. Ìý

However,Ìýthe DMÌýshould query the credibility whereÌýwe have anyÌýconcerns with the expenses claimed in the accounts provided or tax return filed or,Ìýin any revised figures provided.ÌýThe DMÌýwill only look behind the calculation whereÌýtheyÌýbelieve,Ìýon the basis ofÌýevidence, that there is a clear error in the figures orÌýthe DMÌýhasÌýa genuine suspicion (which can beÌýevidenced) that the figures are not beingÌýsubmittedÌýin good faith.