This article looks at the potential changes following a 'call for evidence' in a review of limited partnerships.
There have been reports in the media over the last year that limited partnerships (LPs) in the UK, and in particular in Scotland, have been used to advance criminal activity. These reports allege that LPs are being used as vehicles for money laundering, organised crime and tax evasion.
The Department for Business, Energy & Industrial Strategy (BEIS) has published a 'call for evidence' in connection with a review of the law of LPs.
LPs have traditionally been used for a variety of purposes including oil and gas exploration and production, agricultural tenancies, real estate development and in particular as vehicles for venture capital investment.
The structure of LPs differs from general partnerships. An LP can have one or more 'limited partners' who benefit from limited liability, and must have at least one 'general partner' with unlimited liability. In Scotland (as distinct from LPs in the rest of the UK), an LP is recognised as a legal person and is a separate entity from the partners. This means that a Scottish LP (and a Scottish general partnership) can own assets, enter in to contracts, sue or be sued, own property and borrow money.
The general partner of an LP is solely responsible for management functions. Limited partners may not participate in management and their liability is limited to the capital contributed by them. This is one of the reasons that LPs are often viewed as an attractive vehicle for multi-party investment structures, as control rests with the general partner.
Despite having separate legal personality, Scottish LPs (SLPs) are tax transparent. This means tax authorities look through an SLP and partners are taxed on their respective partnership income. It is alleged that this can lead to partners being invisible when the entity enters into contracts, including opening bank accounts.
Those calling for a review of the law governing LPs argue that LPs are being run by partners who are unknown to enforcement authorities and so it's more difficult to take rapid action and investigate due to the difficulty of tracking the individuals behind the entity. The requirements of the Persons with Significant Control register introduced in the UK in 2016, do not currently apply to LPs. It is therefore argued that LPs are lightly regulated, with very few requirements to publish information relating to the LP or its partners.
BEIS issued a separate discussion paper in November 2016, which considers whether LPs should be subject to the EU Fourth Money Laundering Directive. The outcome of the consultation will be published in Spring 2017 and may lead to the requirements of the Persons with Significant Control register extending to LPs. This would therefore lead to increased transparency regarding LPs in the UK, which is what those alleging criminal activity are seeking.
The private equity and venture capital industry is important to the UK economy and the flexibility, tax transparency and limited liability which are associated with LPs in the UK have made them an attractive vehicle for many years. The UK is a leading centre for fund management with around 35% of all assets managed in Europe managed out of the UK.
Perhaps oddly, on the same day as the call for evidence, a new draft legislation reform order was published. This creates a new status for certain LPs and you can read more on this on our website.
We will have to wait and see what the outcome of the latest consultation on LPs brings. Those with an interest in investment fund structures will watch with particular interest to see whether the LP, a stalwart of the UK and wider European investment scene for so long, will be subject to further reform.