Are HMRC AML late registration penalties fair?

I am sometimes asked about the financial civil penalties that HMRC levy where a business is late registering with HMRC for AML supervision. Are these penalties fair? How are they calculated? How can a penalty be reduced? Can the penalty be appealed?

In this blog post I will try to answer those questions.

Are HMRC civil penalties fair?

Actually that depends upon what you mean by ‘fair’. HMRC follow a system for calculating civil penalties for late registration for AML supervision. They apply the same system to everybody in every case, and there is a process by which one can ask for the penalty calculation to be looked at again by a different HMRC employee. So in that sense the penalties are ‘fair’.

If you mean ‘Are the penalties too severe?’ then that is a rather different question. An HMRC civil penalty for late registration for AML supervision may well be higher than one would expect – and higher than the penalty a different supervisory body (such as one of the supervisory bodies for accountants and bookkeepers) would have charged in the same circumstances.

How are HMRC AML late registration penalties calculated?

The penalty calculation involves several steps, taken in a specific order. It is based on factors including ‘How late was the application to register?’, ‘What size is the business?’, ‘How did the fact of late registration come to light?’ and even ‘How quickly after determination was the penalty paid?’.

How late was the registration application submitted?

HMRC’s approach to this is perhaps best understood by considering a worked example – Sally is a self-employed bookkeeper. She commenced to trade on 3 February 2021. At the time she did not realise that she was required to be supervised for AML compliance and did not apply to HMRC or any of the other AML supervisory bodies for AML supervision. In June 2024 she saw an article on the internet about bookkeepers and the Money Laundering Regulations 2017. She submitted an online application to HMRC for AML supervision on 21 June 2024.

HMRC will consider how many 3-month periods are there in which Sally should have been registered and had not applied (including a final part period). So in Sally’s case the first 3-month period runs from 3 February 2021 to 2 May 2021. The final (part) 3-month period will be from 3 May 2024 to 21 June 2024. In total there are fourteen 3-month periods (including that final part period).

If an application is more than 5 years late HMRC will count this as twenty 3-month periods (i.e. the maximum is 20 periods).

As STEP ONE HMRC will calculate a penalty of £5,000 per 3-month period. So in Sally’s case the Step One figure will be £70,000 (which is 14 times £5,000).

The maximum figure for a Step One penalty is £100,000 (i.e. twenty 3-month periods at £5,000 per period).

What size is the business?

However at Step Two this figure can be reduced (but not increased) based on the size of Sally’s business. Here HMRC will ascertain the ‘gross profit‘ of the business for the most recent year for which accounts are available. In Sally’s case she prepares accounts to 31 March each year. She has prepared her accounts for the year ended 31 March 2024, which show total fees of £78,500 and advertising and office expenses of £12,300. She does not employ any staff. For this purpose HMRC will calculate Sally’s ‘gross profit’ as £66,200. (HMRC calculate ‘gross profit’ for this purpose using a special method described HERE.)

As STEP TWO HMRC will limit the Step One penalty in Sally’s case because her annual ‘gross profit’ is more than £50,000 and not more than £100,000. So at Step Two her penalty is reduced to £10,000. (HMRC’s penalty bands and caps for this purpose are described HERE.)

Was the application more than 12 months late?

At STEP THREE HMRC will consider whether the application is more than 12 months late. If it is, an additional penalty of £200 per 3-month period is added to the Step Two figure. In Sally’s case, her application was more than 12 months late and there were fourteen 3-month periods, so £2,800 (which is 14 times £200) is added to the penalty figure. So at the end of Step Three we have a penalty figure of £12,800.

How did the late registration come to light?

At STEP FOUR HMRC will consider whether the liability came to light because of an unprompted disclosure by the applicant. If it did the penalty from Step Three will be reduced by 50%. In Sally’s case it did, and so her penalty is reduced by 50% to £6,400.

At STEP FIVE HMRC will consider whether the penalty they have arrived at is ‘appropriate’. If they consider it is not an appropriate penalty it can be adjusted.

At STEP SIX HMRC take into account prompt payment. If the eventual penalty figure is paid within 30 days, then the penalty from Step Five is reduced by 25%. In Sally’s case she promptly paid the penalty and so the 25% reduction was applied, which reduced the figure to £4,800 (which is 75% of £6,400).

At STEP SEVEN a penalty administration charge of £350 is added.

So the final penalty which Sally will be required to pay is £5,150 (which is £4,800 plus £350).

Reducing the penalty

As we have seen, Sally’s penalty was reduced because of the size of her business, her unprompted disclosure to HMRC by submitting her application, and by her prompt payment of the penalty.

What about other HMRC AML civil penalties?

This blog article deals only with AML late registration penalties. Other penalties (for example for inadequate records of Customer Due Diligence) are calculated using an entirely different method.

Reviews and appeals

It is open to the person subject to the penalty to apply for another HMRC employee to review the penalty, or to appeal the penalty to an independent tribunal. Some information about this will be supplied by HMRC when the penalty is issued.

Publication

HMRC do routinely publish the names of businesses which have been penalised, the amount of the penalty and brief details of the nature of the conduct being penalised (e.g. late registration).

If you are concerned that your firm’s AML compliance is inadequate, or even non-existent, get in touch now using the link below and we can work together to fix this. The hardest part is getting started.

David Winch MLRO support services ltd

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