In mid January 2017, the government announced a “call for evidence” on a review of the current limited partnership law. Within the same week, they released a revised draft legislative reform order amending the Limited Partnerships Act 1907. This reform will largely relieve private equity and venture capital funds, who favour LP structures, of certain administrative requirements. The “call for evidence” is in line with the UK government’s focus on trust and transparency. This may well enhance red tape in this area, yet the reform order appears to be releasing some of that red tape. So why the confused message – and why is the spotlight on limited partnerships?
The LP Structure
A limited partnership is a special type of partnership, principally governed by the Limited Partnership Act 1907 (as amended by The Legislative Reform (Limited Partnerships) Order 2009). The limited partnership is a partnership (not a company or corporate body) and is subject to most of the rules of general partnership law.
It must have at least one general partner who remains liable for all debts and obligations of the partnership and at least one partner who is a limited partner. The limited partner contributes a fixed sum of capital to the partnership and that partner’s liability for the partnership debt is limited to the fixed amount. The partnership will contribute an initial amount of capital. Its constitution will be a partnership agreement, which must be signed by the partners. The agreement does not have to be registered at Companies House but certain information from it must be provided to the Registrar of Companies on registration.
There is an important distinction between Scotland and England and Wales in that a Scottish limited partnership, like a normal Scottish partnership, has its own legal personality quite distinct and independent from its partners. A limited partnership or an ordinary partnership in England and Wales has no legal personality itself, the partnership amounts to the identities of the individual partners.
The limited partnership will keep normal partnership accounts. Dependent upon the structure used, the limited partnership may or may not need to file statutory accounts at Companies House.
Two features of the limited partnership often make them attractive for tax planning purposes. These are:
1. Provided the management and control of the trade and business of the partnership is situated outside of the UK, the business is deemed to be carried on by non-residents and the partnership is deemed to be non-resident for tax purposes.
2. In relation to Scottish Limited Partnerships (“SLPs”) only, as they have independent legal personality they are a separate fiscal entity for the purposes of tax laws of certain overseas jurisdictions.
The main advantages of the limited partnership is that it allows participation in the profits of a partnership by the limited partner without incurring unlimited liability. It has been used particularly to take advantage of independent taxation of spouses, in joint venture arrangements, in certain types of family run businesses and in some offshore tax planning arrangements.
The quid-pro-quo to the limited liability for the limited partner is that the limited partner may not take part in the management of the LP, they have no power to bind the LP and they may not withdraw their capital contribution without risk of relinquishing their limited liability and winding up the partnership.
The LP structure allows for attractive tax planning for non-residents, in particular with SLPs being recognised as a separate fiscal entity.
New rules for investment funds
The legislation in this area has remained largely unchanged for most of the 20th century. In recent years, the limited partnership has become the structure of choice for private equity and venture capital funds but such outdated legislation is not best suited to the needs of a modern, global industry. Other jurisdictions have either already introduced, or have plans to introduce laws that provide the flexibility this sector needs. So the proposed changes to the Limited Partnerships Act 1907, designed to reduce the administrative and financial burdens that impact these funds under the current structure, are very welcome.
The proposed changes introduce a new structure – the Private Fund Limited Partnership (“PLFP”). New or existing limited partnerships which meet certain criteria can be designated as a PFLP. To qualify they must:
Be constituted by an agreement in writing
Be a collective investment scheme
In short, it provides for certain administrative matters that are specific to a funds sector decision making process, not be classified as a limited partner “taking part” in the management of the partnership and therefore not jeopardising their limited liability status. The legislation is due to come into force on 6 April 2017.
Companies House recently announced the introduction of new or amended forms, namely:
A new form LP7 – Application to register a new limited partnership which is to be designated as a PFLP
A new form LP8 – Application for an existing limited partnership to be designated as a PFLP
Modified form LP5 – to make it clear that it is only to be used to register an ‘ordinary’ limited partnership
Modified form LP6 – to take account of reduced notification requirements by designated PFLPs.
Draft legislation and associated documents have been published on the GOV.UK website https://www.gov.uk/government/publications/legislative-reform-order-to-change-partnership-legislation-for-private-equity-investments
Why the "Call for Evidence"? - The possible mischief
Due to the opaque nature of the LP structure, in particular: the ownership; the constitution; the filing (or otherwise) of partnership accounts; and; the attractive tax planning advantages for non-residents, the Department of Business, Energy and Industrial Strategy (“BEIS”) has issued a Review of Limited Partnerships Law Call for Evidence, in order to understand more fully who is using this type of structure and why. The exercise will consider whether the current framework should be reviewed with a view to increasing transparency and reporting requirements.
In recent years there has been an increased use of SLPs, in particular. There has also been some uncomfortable media coverage in the Scottish press relating to false or unsuitable premises being used as registered offices for SLPs. This all adds to the concern that these structures may be used by organisations that wish to move money in an opaque fashion. The increased use may well be for legitimate reasons and therefore a positive response to BEIS’s call by those professional advisers who advocate the use of SLPs for relevant tax planning purposes, will help to alleviate the concern in this area.
The Review of Limited Partnership Law Call for Evidence can be found at https://www.gov.uk/government/consultations/review-of-limited-partnership-law-call-for-evidence
It appears the UK government understands that the LP structure continues to have a place in the UK business world and its use is favoured by certain sectors, hence the latest reform. However, by its very nature as an opaque structure, the LP is in stark contrast to the global view of transparency around who one is doing business with. If the call for evidence exercise demonstrates that these structures are still largely used by family run businesses, or private funds, for legitimate business reasons, there may not be need for additional reform. If, however, the response demonstrates the LP structure is now used for less honourable reasons, we may well see a change in this area.
About the author: Debbie Farman is Director of Legal Practice, Jordans Corporate Law Limited