Many investment funds in the alternatives sector make use of partnership structures, in particular in the private equity, infrastructure and non-core real estate sectors. The tax transparency and general flexibility of such vehicles lend themselves well to the operating models and commercial terms of such funds.
The release of the Panama Papers in April 2016, however, brought to light the use of Scottish limited partnerships as components in certain tax shelter and money laundering arrangements. Since then there has been considerable interest in the UK, and in particular the Scottish press, regarding the use and misuse of such vehicles. The UK Government has conducted extensive investigations over the course of 2017 to seek to understand this phenomenon further and also to understand better the range of legitimate uses of such vehicles.
Within the UK there is a difference in the juridical nature of partnerships, with Scottish partnerships having “legal entity” status but English Partnerships constituting associations without entity status. In the funds sector a combination of such partnerships are often usefully used in layered structures to ensure that a proper separation is achieved between the separate layers and a number of classic fund formation jurisdictions have recognised the utility of these features and have introduced a similar range of partnership vehicles, with and without entity status. Aside from this distinction (and a slightly more stringent disclosure regime for SLPs noted below) there is no substantive difference in the tax or regulatory treatment of partnerships in the UK. However, as noted below, it seems that in some other jurisdictions authorities have tended not to look behind the entity status of Scottish partnerships and this has facilitated their use in disguising ownership of illegally sourced assets.
In April 2018 BEIS published a consultation paper seeking views on a number of reform proposals intended to stem this misuse. The consultation paper reported that there was evidence of recent misuse of SLPs. There was, between 2011 and 2016 a marked spike in the formation of such vehicles which seems only partially explained by new legitimate uses and it seems possible that unscrupulous parties were actively marketing their inappropriate use. This trend appears now to have fallen off somewhat, and one may speculate that increased scrutiny has reduced attractiveness.
However, in the consultation paper the Government also indicated a reassuring understanding of the wide uses and contexts in which limited partnerships are used, in particular in the funds industry, and recognised the economic benefits from legitimate uses. Accordingly, much to the relief of those involved in devising fund structures, the government does not propose to abolish separate legal personality for SLPs. Instead, it is seeking responses to proposals to tighten transparency requirements and to focus on financial crime aspects directly:
- It is proposed that all persons seeking to register a limited partnership must confirm that they are subject to AML supervision by an appropriate body. The report found that almost all partnerships formed for legitimate purposes were submitted by law firms or registration agents and this simple measure may provide a helpful barrier discouraging unlawful use;
- Views are being sought on two alternative proposals as regards the obligation for a partnership to maintain a connection with the UK:
- a requirement to maintain a permanent principal place of business in the UK, which would be confirmed annually in a confirmation statement; or
- a requirement to maintain a permanent UK address for service (more akin to the position for companies, but falling short of a full registered office requirement) with this address, and the principal place of business (which could be outside the UK) being confirmed annually.
The ability for limited partnerships to be able to migrate their principal place of business outside the UK has been an important and useful flexibility in enabling funds using UK vehicles (which UK based investors may prefer) to be managed outside the UK (which may be a practical necessity where the desired asset class is outside the UK). A UK principal place of business or registered office requirement would also have the effect that such a fund would fall within the Alternative Investment Fund Managers Directive (creating an unhelpful duplication of regulation with the regime which is the actual management locus). The Private Equity and Venture Capital industry have made these points in their response, encouraging the Government to adopt a route which would fall short of a formal place of business or registered office.
- There is a proposal to introduce increased transparency and reporting requirements for all UK LPs. Scottish Limited partnerships have, since June 2017, been subject to a more stringent disclosure regime than is currently applicable to English limited partnerships (their entity status bringing them within the “entity regime for the 4th Money Laundering Directive) and they are subject to broadly the same requirements to disclose “Persons with Significant Control” (PSCs) in the UK registers as UK companies. They must also submit annual confirmation statements confirming certain information. If these proposals are accepted the regime for ELPs will be partially aligned and they will be required to submit confirmation statements annually confirming certain limited information. However, it does not appear to be that case that the PSC regime will be aligned for SLPs and ELPs.
- Views have also been sought on applying an accounts filing obligation on all Limited Partnerships (at present only “qualifying Partnerships” are required to file accounts (essentially those with corporate general partners). At present it is possible for a partnership to fall outside the filing requirements if it has an individual or LLP as a general partner (either solely or in conjunction with a corporate general partner).
- There is also a proposal to introduce a strike off procedure analogous to the company strike off regime. Whilst an ability to request the removal of dissolved partnerships has long been sought, and would be welcome, the strike off proposals may well give rise to some concern to investors. The effect of striking off a limited partnership will not necessarily be to terminate the partnership if it continues to trade, but rather it could merely remove the shield of limited liability for limited partner investors, leaving them exposed to the liabilities of a general trading partnership. Strike off triggers are linked to administrative failures, particularly where notice is only given to the general partner, may be a concern to investors.
The consultation closes on 23 July 2018. The government intends to introduce primary legislation to implement changes as soon as Parliamentary time allows after the consultation closes.