The economic crime levy in insolvency processes
We look at the economic crime levy (ECL) and how it applies in the context of insolvency processes.
The economic crime levy (ECL) is an annual charge introduced by part three of the Finance Act 2022.
It was first charged in the financial year running from 1 April 2022 - 31 March 2023 on any medium, large and very large entity (UK revenue in excess of £10.2 million per year) regulated for anti-money laundering (AML) purposes at any point during that year.
The economic crime (anti-money laundering) levy regulations 2022 (‘the 2022 regulations’)
The 2022 regulations, which came into force on 1 April 2022, make provision for the assessment, payment, collection and recovery of the ECL.
Part six applies the regulations to insolvency practitioners (IPs) where a person liable to pay the levy has become bankrupt; or is subject to winding-up, receivership, administration or an equivalent procedure.
Crucially, this appeared to have the effect of making insolvency practitioners potentially personally liable for the ECL due by insolvent businesses, with the regulations stating that IPs “….may be treated by the appropriate collection authority as the person liable to pay the levy”.
The economic crime (anti-money laundering) levy (amendment) regulations 2023 (‘the 2023 regulations’)
The 2023 regulations came into force on 28 March 2023 and amended the 2022 regulations to make further provisions relating to the ECL.
Regulation 10 of the 2023 regulations clarifies that:
- “Any amount of levy which relates to UK revenue attributable to a period before the date when the winding-up, receivership, administration or other equivalent procedure takes effect is payable by the person subject to the winding-up, receivership, administration or an equivalent procedure, and not by the person treated as the person liable to pay the levy under paragraph”.
- “Any amount of levy which relates to UK revenue attributable to a period on or after the date when the winding-up, receivership, administration or other equivalent procedure takes effect is to be regarded as an expense of that winding-up, receivership, administration or equivalent procedure.”.
Therefore, for the purposes of the insolvency of an AML regulated entity, any amount of the ECL that relates to revenue attributable to a period on or after the date of the insolvency procedure (for example, in a trading-on scenario) is to be regarded as an expense of the procedure. Any amount of the ECL due for the period pre-insolvency remains a liability of the entity and will consequently form a claim in the insolvency process.
While the amendment to the treatment of the ECL in an insolvency process is welcomed, particularly in respect of the personal liability of the IP, the wording within the 2023 regulations still leaves some room for ambiguity and interpretation. In particular, why is it to ‘be regarded as’ rather than ‘is’ an expense of the process and are there implications for any possible difference in language? In addition, and on the assumption that the ECL would be an expense of the process, where in the order of priority does it sit?
We raised these issues with the policy team at the Insolvency Service, which has clarified as follows:
- The phrase "is to be regarded as" has no special meaning within the legislation and can be read as 'it is'.
- “There is nothing in the ECL legislation to state where the levy sits in the order of priority where post-insolvency activity subject to money laundering regulations takes place. We would therefore advise that the levy will sit in the same place in the order of priority as any other tax except for Corporation Tax”.
We presume the reference to corporation tax relates to corporation tax on chargeable gains as this is the only specific reference in the various priority of expenses rules. In any event, it is clear that the ECL will rank as a general expense payable in priority to an insolvency practitioner's remuneration.
IPs should ensure that, where an insolvent entity is AML regulated, as part of their pre-appointment considerations and strategy, the impact of the ECL is considered.
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