A regular briefing for the alternative asset management industry.
Policymakers have made welcome moves to improve the UK funds regime in recent years, and the BVCA – the UK's private equity and venture capital association – has an active and productive dialogue with regulators and government. But, as well as supporting efforts to make positive changes, a vital part of the BVCA's work is to limit the unintended impacts of rule changes on the private capital industry – a vital sector, but one whose structures and investment model are not widely understood.
Current proposals to reform UK limited partnership law are a case in point.
Since 2017 the government has – for good reason – been looking at how it can prevent abuse of limited partnerships. It is clear that criminals have made use of limited partnerships (particularly Scottish ones) as a cover for illegal activity. It is in everyone's interests that such abuse stops. Reforms to the structure have therefore been under active consideration for some time, and the BVCA has been in active dialogue with BEIS, the government department leading the charge.
English and Scottish limited partnerships are still a centrepiece of the UK private equity and venture capital industry. Tax transparent, flexible and widely understood by investors, they were the European structure of choice for decades.
Reforms in 2017 to improve the attractiveness of the UK structure were, in part, a response to regulatory competition from Luxembourg and the Channel Islands, who continue to improve their domestic structures. Recent reforms to Irish limited partnership law – and, more importantly, Brexit – have added to the reasons to look elsewhere.
But, despite these challenges, UK limited partnerships remain integral to many fund structures.
Although the government's view is that more reforms are needed to stamp out abuse by criminals, there is evidence that such abuse has reduced: the law was changed in 2017 to include Scottish limited partnerships in rules requiring disclosure of beneficial ownership, and fewer Scottish limited partnerships have been registered since. Nevertheless, now – as part of a law reform proposal that aims to improve transparency more widely – a number of further changes are proposed to UK limited partnership law.
Some of these changes would seem to go further than needed to tackle the identified abuse, and include proposals to improve the information on the public register – but it is also clear that the government has been listening to industry concerns and modified some of the proposals accordingly.
For example, the draft law – currently going through the legislative process and expected to pass in spring 2023 – will require UK limited partnerships, both new and existing, to have a UK registered office (as well as a "principal place of business"). The BVCA is hopeful that BEIS will find ways to preserve the existing regulatory status for funds that have "migrated" outside of the UK, recognising that such a change could have important regulatory consequences for an existing fund.
… it is clear that changes are on the way … these will affect every new UK limited partnership, as well as every firm that already has UK limited partnership funds
However, not all of the industry's concerns have yet been fully addressed. For example, the BVCA continues to explain to policymakers that proposals to allow the de-registration of limited partnerships in certain circumstances need to be accompanied by safeguards to address concerns that limited partners might find themselves losing the benefit of their limited liability without any fault on their part.
There is also residual risk of criminal sanctions for (innocent) limited partners in certain limited circumstances, which remains worrying because – although the risk is remote – it could dissuade some investors from accepting a UK limited partnership as the fund's investment vehicle. The requirement for significant additional information to be provided to the registrar will likely add to administrative complexity in a way that puts off some (legitimate) users – especially since alternative structures are available in other European countries (and a recent European court decision will restrict the amount of information on EU public registers for the time being).
In any event, it is clear that changes are on the way. These will affect every new UK limited partnership, as well as every firm that already has UK limited partnership funds (or co-investment or carried interest vehicles). In particular, there will be a requirement for more information to be filed on individual limited partners (although it will not all be publicly available), for every general partner to have a named "registered officer", and for almost all filings to be made by an "authorised corporate service provider".
In addition to the filings that are needed when certain changes are made to the limited partnership, annual confirmation statements will also be required from all UK limited partnerships (and not just from Scottish limited partnerships, as is currently the case). And while there is no change to the existing rules on partnership accounts, the UK tax authority, HMRC, will have (apparently open-ended) powers to demand accounts in cases where it wants more information to check tax compliance.
The BVCA's work on these proposals has already achieved a lot. Closing down abuse is critical, but the important collateral damage that might harm the vast majority of legitimate (and, incidentally, regulated) users needs to be weighed in the balance. Such damage can undermine other efforts to remain internationally competitive and the BVCA plays a vital role in pointing that out.