Limited Partnership Reforms: "It's the end of the world as we know it and I feel fine"

Bad people have been doing bad things with UK Limited Partnerships and Scottish Limited Partnerships (SLPs) in particular. It’s far from clear who these bad people are (indeed the Department for Business, Energy & Industrial Strategy (BEIS) last year issued a call for evidence in part trying to answer that question, although one can only assume none was included in the 45 respondents). What is clear is that a ‘perfect storm’ of (i) two decades of UK government policy of making it easier and cheaper to register businesses, (ii) an ‘arms race’ in international money laundering and its detection and (iii) tax changes in certain overseas countries opening loopholes to be exploited, have contributed to SLPs being misused on an industrial scale. BEIS has concluded that five “frontmen” (their term) have been responsible for registering over half of the 6,800 SLPs registered between January 2016 and mid-May 2017.

As a consequence, the call has gone out from politicians in both Westminster and Holyrood that “Something must be done”. Have no doubt, while a year has passed since the original call for evidence, in the context of a statute (the Limited Partnerships Act 1907) that has stood largely unchanged for 110 years, this is law reform at a frenzied pace. BEIS have recognised that SLPs “have become a critical building block in UK private equity structures and have provided an innovative funding mechanism for asset-backed contribution pension schemes or pension deficit structures”. Indeed there is some evidence that the stable-door is swinging here as, if anything, the deluge of partnership registrations appears to have dropped-off, in part in response to some of those overseas loopholes having been closed and in part because of the increased scrutiny of SLPs.

So here we have an age-old dilemma: how to separate the baby from the bathwater and devise a proportionate response?

BEIS have therefore published a consultation asking for views on proposals:

• That all presenters (those seeking to register a limited partnership in the UK on behalf of another) confirm their registration and that they are subject to anti-money laundering supervision with an appropriate supervisory body and by doing so reinforce the existing AML requirements on such presenters.
• That in order to maintain some connection with the UK beyond the mere act of registration, and to ensure the relevant authorities can locate the partnerships, the registered principal place of business of a limited partnership be required to remain in the UK (Option A) or, if moved outside the UK, a UK service address be registered (Option B).
• Increasing the transparency requirements in respect of all limited partnerships to require an annual confirmation statement as to the accuracy of the information on the public register and potentially moving beyond that to all limited partnerships being required to prepare and file accounts in line with the requirements for private companies.
• That the 1907 Act be amended to allow for the removal from the register of defunct or non-compliant partnerships akin to the position which currently exists for striking-off limited companies.

The first proposal arguably most directly addresses the issue at hand and appears unproblematic given that formation agents should already be complying with AML requirements.

The second proposal, while at first sight straightforward, does re-ignite a long-standing debate as to what the 1907 Act means by ‘principal place of business’ (aka the ‘ppb’) and whether that ‘ppb’ may, following registration, be moved outside the jurisdiction of initial registration. Adoption of Option A, at the same time as requiring the ‘ppb’ to reflect something more akin to the centre of management and control of the limited partnership, would unduly restrict the use of limited partnerships for international structures. We would argue the more proportionate step would be to adopt the position recommended in 2003 by the Joint Law Commissions of Scotland, England and Wales and replace the ‘ppb’ with a more easily understood registered office requirement.

The third proposal, equivalency with the limited companies disclosure regime in terms of an annual confirmation statement, is hard to argue against, as it already applies to SLPs. Debate will continue as to the proportionality of requiring filing of accounts. While that will inevitably aid transparency, it is a significant new burden on many partnerships, with not much by way of evidence that it is needed to address the problem of abuse.

The fourth proposal will help to tidy-up the public register (it’s thought as many as 4,000 of the currently registered partnerships may have been dissolved) and give Companies House one important enforcement sanction, albeit concerns will remain as to the accidental striking-off of vehicles.

We consider the core of the proposals generally to be proportionate. As such, we broadly welcome the proposals. The consultation will close for responses by 23 July 2018. We will be submitting our own thoughts (as we did in 2017) but we would very much like those to reflect any thoughts you have as our clients so please feel free to contact us.