We wrote in May 2018 about the Government’s consultation on proposed changes to limited partnership law, to address apparent concerns that UK limited partnerships (LPs) are being used for illegitimate purposes (the Consultation). The Consultation closed in July and on 10 December the Government published its response which sets out its plans to implement changes to legislation (the Response).
What did the Consultation seek views on?
The Consultation recognised that limited partnerships, and particularly Scottish limited partnerships, were a ‘critical building block in UK private equity structures’ but also suggested they were being misused for criminal purposes. The Government’s aim in proposing the changes is to limit the potential misuse of LPs but also to ‘ensure that LPs remain attractive for legitimate business use, particularly as investment vehicles’.
Broadly, the Consultation suggested four areas for reform in relation to registration of LPs, introducing a requirement that a LP must have a ‘connection’ with the UK, introducing ongoing reporting requirements and empowering the Registrar of Companies to strike off LPs under certain circumstances.
NCM submitted a response to the Consultation. It goes without saying that, in principle, we are supportive of any steps which would minimise the misuse of LPs, but we also expressed some concern that the proposed changes may not really address this misuse (because most of the proposed changes would not affect those who set up and use LPs legitimately). We (like many other respondents) were also concerned that, given the current climate, any changes would not result in making the UK a less attractive place to carry out legitimate business.
And the Government’s Response?
Each of the proposed areas of reform are to be taken forward.
1. First registration with an anti-money laundering (AML) supervisory body.
The Government intends to make it mandatory for presenters of new applications for registrations of LPs to demonstrate they are registered with an AML supervisory body (and will seek to ensure that applications from overseas will be subject to equivalent standards). This will end direct registrations of LPs.
2. Ongoing connection with the UK
The Government accepted concerns voiced by some of the respondents that making it a requirement that a LP has a principle place of business would limit the flexibility of the LP model and could discourage legitimate investors from using LPs but at the same time stated that it is ‘vital for LPs…to maintain some demonstrable link to the UK’. It therefore proposes that, on application, a LP must provide a UK principal place of business and thereafter, a LP will need to either:-
a. retain its principal place of business in the UK; or
b. demonstrate that it is continuing some legitimate business activity at an address in the UK; or
c. demonstrate that it continues to engage the services of an agent which is registered with a UK AML supervisory body and which has agreed to provide its address as a service address for the LP.
The Government states that it will consider what evidence will be needed to demonstrate each of these three criteria. It also states that it will consider how this new requirement should apply to existing LPs, including the possibility of transitional arrangements, so it is worth noting that this change will have an impact on existing LPs.
3. Greater reporting requirements
a. Accounts - the Government has accepted the views of the majority of respondents who felt that requiring a LP to submit accounts would create an administrative burden, and in respect of UK-registered partners who are obliged to submit returns to HMRC would be duplicative, and so does not intend to take forward the proposal for all LPs to file accounts. Having said that, the Response goes on to state – perhaps rather ominously - that ‘where there are any gaps in the requirements for partnerships to file basic accounts with the UK Government, the Government will close those gaps in a way that is not burdensome or duplicative’. It remains to be seen what this will look like in practice.
b. Confirmation statement - Scottish LPs are already required to file an annual confirmation statement. The Government proposes that this regime be extended to LPs registered in England, Wales and Northern Ireland.
c. Information on registration - the Government proposes to expand the information required on registration of a LP to include:-
i. contact information for all limited and general partners;
ii. the date of birth and nationality of all limited and general partners who are natural persons; and
iii. a SIC code identifying the nature of the business of the LP.
Again, it is worth noting that the Government intends to introduce a transitional period to enable existing LPs to submit the additional information. The Government also indicates that it will undertake further work to explore whether to require beneficial ownership information from corporate partners which do not already hold a PSC (person with significant control) register.
4. Striking off
All of the respondents supported the proposals to introduce a striking-off procedure, to varying degrees, although there were clearly concerns about the impact of striking off a LP in error (because the result would be that the limited partnership would become a general partnership, and the limited partners would consequently lose their limited liability status). Despite these concerns, the Government states that it will grant the Registrar of Companies the power to strike off LPs which are dissolved or which the Registrar concludes are not carrying on business or in operation. The process will apparently be subject to a ‘robust’ notification process at least as strong as the process for limited companies and will also include allow restoration of LPs which have been struck off.
It’s clear that, once introduced, the proposed changes will affect both existing and new LPs, so partners and those involved in the establishment and ongoing administration of LPs will need to keep an eye on developments here. That said, the Response is somewhat vague in terms of when the changes will be implemented. All the Response says is that the Government ‘intends to legislate when Parliamentary time allows’. We sense that it could be some time before anything substantive happens..!