Too Heavy on the Levy? Now in force: the Economic Crime Levy - what you need to know

With the first payments due under the government’s new Economic Crime Levy from 1 April 2023, Ruth Paley and Jess Hambly take a look at the scope of the new arrangements, cover amendments to the original legislation and provide a list of considerations for firms subject to the requirements.

In 2020, the government announced its plan to introduce the Economic Crime Levy (the Levy) in order to raise approximately £100m from the anti-money laundering (AML) regulated sector to fund government initiatives outlined in its Economic Crime Plan.

The Levy was subsequently implemented by the Finance Act 2022 and provision for the assessment, payment, collection and recovery of the Levy was set out in the Economic Crime (Anti-Money Laundering) Levy Regulations 2022 (2022 Regulations). Further draft regulations to amend the Levy were published on 28 February 2023 and were debated in the House of Commons on 21 March 2023 (2023 Regulations).

The first Levy payment will be payable from 1 April 2023 on revenue from periods of account ending in the year 1 April 2022 to 31 March 2023 (the Levy financial year).

Scope

The Levy applies to any person carrying on a regulated business in the UK under the Money Laundering Regulations 2017 (MLR). This includes credit institutions and financial institutions, auditors, accountants, tax advisers, estate and lettings agents, independent legal professionals, high value dealers, casinos and crypto asset exchange providers.

The fee

The Levy is only payable by regulated entities with a UK revenue of over £10.2 million by reference to the UK revenue for the accounting period ending in the Levy financial year. Where a regulated entity’s accounting period does not align with the relevant financial year, the following rules apply:

• where there is no accounting period ending in the relevant financial year, the accounting period is the one that ends within three months of the end of the relevant financial year, or alternatively the accounting period that ends closest to the start of the relevant financial year
• if more than one accounting period ends in the financial year, the entity’s UK revenue for the financial year is taken to be the combined revenues from those accounting periods

Regulated entities pay a fixed fee depending on whether they are classified as medium, large or very large entities by reference to their UK revenue:

• UK revenue more than £10.2 million but less than £36 million (medium): £10,000
• UK revenue more than £36 million but less than £1 billion (large): £36,000
• UK revenue more than £1 billion (very large): £250,000

There was strong industry support during the consultation phase for the Levy being attributable only to the portion of an entity’s revenue that is generated by its “AML-regulated activity”. However, this proposal was ultimately rejected on the basis that firms would apparently find it difficult and cost-inefficient to identify the revenue generated by this activity. The government also felt that it would be difficult to corroborate and verify the figures, and would necessitate external expertise. The Levy therefore applies to all of the firm’s UK revenue regardless of the regulated status of the activity giving rise to that revenue. Where an entity generates revenue both in the UK and elsewhere, the UK revenue will be the amount after the deduction of revenue attributable to the activities of any permanent establishment of the entity outside of the UK.

Collection and payment

The Levy is collected by one of three collection authorities: the FCA, HMRC and the Gambling Commission. The way in which the Levy is collected and paid varies slightly, to align with existing fee processes, as follows:

• where the FCA is the relevant collection authority, all FCA regulated firms, other than Annex 1 financial institutions, must submit their revenue data via a new Reg Data Report between 1 April 2023 and 2 May 2023. Those firms registered as an Annex 1 financial institution will receive a letter to report their data. Where an FCA regulated firm is liable to pay the Levy, the FCA must submit a prior written notice requesting payment, with payment due 30 days after the date of the written notification
• entities supervised by one of the UK 22 professional body supervisors (for example, the Law Society, or the Institute of Chartered Accountants in England and Wales) must perform a self-assessment and submit a return and payment on or before 30 September 2023 to HMRC. Regulated entities will be able to amend their returns at any time up to 12 months after the filing date. HMRC has promised more detailed guidance later in 2023
• entities supervised by the Gambling Commission must also self-assess and submit a return in the same way as with HMRC above

The 2023 Regulations

The 2023 Regulations, which remain in draft and were published in February 2023, introduce several changes to the Levy to address defective drafting in the 2022 Regulations. Neither the explanatory notes or debate in the Delegated Legislation Committee contain much by way of explanation as to the nature of the issues. It is clear, however, that the 2022 Regulations were inconsistent in respect of the arrangements applying to each collection authority, and did not include a penalty regime.

Key changes are as follows:

• amendments to notices and returns – firms whose collection authority is the Gambling Commission or HMRC may amend a return at any time up to 12 months after the due date (the 2022 Regulations only expressly allowed this for firms supervised by the FCA)
• information and record keeping requirements – a regulated entity must provide the collection authorities with such documents and information as they request in connection with the Levy. Records of documents needed to make complete and accurate returns must also be preserved for a period of 6 years. The power of the Gambling Commission to maintain a public register of firms who had notified the Commission of their liability to pay the Levy, which was set out in the 2022 Regulations, has been removed
• enforcement – the 2023 Regulations set out the circumstances in which collection authorities can impose a civil penalty on firms. These include a failure to: submit the return by the due date; comply with a request for documents; comply with record keeping requirements; and a more general failure to pay the Levy. Collection authorities are not able to impose a financial penalty where the firm has a reasonable excuse for the failure to comply
• penalties – Penalties are either paid at a flat rate (ranging between £250 to £3000 depending on the regulatory failure) or 5% of the unpaid Levy. A penalty notice must be issued within four years from the due date of the relevant Levy and must be paid by a firm within 30 days from receipt of the penalty notice
• appeals – Levy decisions made by HMRC or the Gambling Commission can be appealed to the First-tier Tribunal and decisions made by the FCA can be the subject of judicial review

What should firms be doing?

Firms should be:

• gathering the relevant data for submission to the collection authorities by the July date
• ironing out any nuances regarding jurisdiction and/or whether entities are caught by the Levy by the nature of the activity conducted
• identifying the relevant Levy bracket and ensuring there is provision in place
• ensuring that any figures provided to the collection authorities are audited
• ensuring that record keeping controls and procedures are in place (if not already)

Firms may also want to consider whether, in circumstances where the business undertaken comprises a mix of UK regulated and non-regulated activity, and the former is a much smaller proportion of the whole than the latter, it would be appropriate to segregate the firm’s regulated activity within another entity in order to restrict the Levy liability to the regulated activity only.