Understanding the Economic Crime Levy: What It Means for Businesses

28 November 2024

The fight against economic crime has been intensifying globally, and the UK is no exception. As part of its broader efforts to curb financial crime, the UK government has introduced the Economic Crime Levy (ECL). This new levy, which came into effect on July 1, 2022, aims to raise funds to support the fight against economic crimes such as money laundering and terrorist financing. For businesses, particularly those in the financial sector, understanding the implications of the ECL is crucial for compliance and financial planning.

WHAT IS THE ECONOMIC CRIME LEVY?

The Economic Crime Levy is a mandatory charge imposed on entities that are subject to the Money Laundering, Terrorist Financing, and Transfer of Funds (Information on the Payer) Regulations 2017. Essentially, the levy targets businesses that are already required to take measures against money laundering and terrorist financing. The funds raised from the levy are intended to bolster the UK’s ability to prevent and combat economic crime.

The government has set a target to raise approximately £100 million annually through the ECL. These funds will be used to enhance the capabilities of regulatory and enforcement agencies, including the Financial Conduct Authority (FCA), HM Revenue & Customs (HMRC), and the National Crime Agency (NCA).

WHO IS LIABLE TO PAY THE LEVY?

The ECL applies to a broad range of businesses, primarily those within the financial services sector. This includes, but is not limited to, banks, asset managers, investment firms, and insurance companies. If your business is subject to anti-money laundering regulations, it is likely that you will be liable for the levy.

The levy is tiered, meaning that the amount payable depends on the size of the business as determined by its UK revenue. The tier structure is as follows:

Small Businesses: Entities with UK revenue of less than £10.2 million are exempt from the levy.

Medium Businesses: Entities with UK revenue between £10.2 million and £36 million are subject to a levy of £10,000 per year.

Large Businesses: Entities with UK revenue between £36 million and £1 billion are subject to a levy of £36,000 per year.

Very Large Businesses: Entities with UK revenue exceeding £1 billion are subject to a levy of £250,000 per year.

The levy is assessed annually, and businesses are required to self-assess their liability based on their UK revenue.

HOW IS THE LEVY CALCULATED?

The Economic Crime Levy is collected by HMRC, the FCA, and the Gambling Commission, depending on the type of entity. These authorities are responsible for ensuring that businesses comply with the levy requirements and for collecting payments.

For businesses regulated by the FCA, the levy is collected alongside the FCA’s annual fee. Similarly, businesses regulated by the Gambling Commission will pay the levy along with their annual license fees. For other businesses, HMRC will handle the collection of the levy, and payments must be made directly to HMRC.

IMPLICATIONS FOR BUSINESSES

For many businesses, the introduction of the ECL represents an additional financial burden. However, it also underscores the increasing regulatory focus on combating economic crime. Businesses must ensure that they are not only compliant with existing anti-money laundering regulations but also fully aware of their obligations under the new levy.

Financial Planning: The ECL will necessitate adjustments to financial planning, particularly for large and very large businesses facing significant annual charges. Businesses should factor the levy into their budgets and consider its impact on profitability.

Compliance and Reporting: Businesses need to accurately assess their liability for the levy based on their UK revenue. This requires robust internal processes for tracking and reporting revenue, as well as ensuring that payments are made on time to avoid penalties.

Strategic Considerations: The ECL may influence strategic decisions, particularly for businesses that are close to the thresholds between the different tiers. For example, a business on the cusp of moving from the medium to the large category may weigh the cost implications of the increased levy against potential growth opportunities.

OPPORTUNITIES FOR MITIGATION

While the ECL is a mandatory charge, businesses can take steps to mitigate its impact:

Revenue Management: Businesses may explore ways to manage their UK revenue to remain within a lower tier of the levy. However, this must be done carefully to avoid any perception of tax avoidance or manipulation.

Investment in Compliance: By investing in robust compliance measures, businesses can reduce the risk of regulatory penalties and enhance their ability to detect and prevent economic crime. This not only aligns with the objectives of the ECL but can also improve a business’s reputation and trustworthiness.

Engagement with Regulators: Businesses should maintain open lines of communication with their regulators, including HMRC and the FCA. By staying informed about regulatory changes and seeking clarification on any uncertainties, businesses can ensure they remain compliant and avoid unnecessary penalties.

PREPARING FOR AN AUDIT

If your business is nearing the audit threshold or has chosen to undergo a voluntary audit, preparation is key to a smooth process. Here are some steps to ensure you’re ready:

  • Strengthen Internal Controls: Review and improve your internal controls to ensure they are robust and effective. This includes segregation of duties, approval processes, and safeguarding assets.
  • Maintain Accurate Records: Ensure all financial transactions are well-documented, with supporting evidence for each entry. This will make the auditor’s job easier and help avoid delays or issues during the audit.
  • Review Revenue Recognition Policies: Make sure that your revenue recognition practices align with current accounting standards, and that you’re recognising revenue at the appropriate times.
  • Prepare for Tax Scrutiny: Double-check your tax calculations and ensure that all liabilities have been accurately recorded.
  • Assess Your Assets: Review your asset valuations and ensure that depreciation and impairments are accounted for correctly.

Understanding audit limits and preparing for potential audits, whether mandatory or voluntary, is crucial for businesses of all sizes. While some companies may fall below the threshold, opting for a voluntary audit can offer significant benefits in terms of credibility, internal control improvements, and strategic insights.

LOOKING AHEAD

The introduction of the Economic Crime Levy marks a significant step in the UK government’s efforts to combat financial crime. For businesses, this new levy is not just a financial obligation but a clear signal of the increasing regulatory scrutiny in this area.

As the ECL becomes an established part of the regulatory landscape, businesses must prioritize compliance and ensure they are fully prepared to meet their obligations. This includes accurately assessing their liability, making timely payments, and considering the broader implications for their financial and strategic planning.

In the long run, businesses that proactively engage with the ECL and strengthen their anti-money laundering measures will be better positioned to navigate the evolving regulatory environment and contribute to the fight against economic crime.

For more detailed guidance on how the Economic Crime Levy affects your business and what steps you can take to ensure compliance, get in touch with our audit team, or call 01904 558 300.

Being prepared and informed is the best way to manage this new financial obligation effectively.

 

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