Taxation neutrality

67. The 1997 paper announced the Government's intention that UK registered LLPs would be "treated as partnerships for the purpose of UK income tax and capital gains tax, and for the purpose of National Insurance", and that there would be no tax implications in the transformation of a partnership into an LLP.[111] The 1998 paper confirms this intention, recording the view of practitioners that tax neutrality was vital in ensuring that the LLP would be "an attractive and viable vehicle".[112] This was indeed a general view: the Law Society, for example considered it as "essential" that the tax treatment of a partnership converting to LLP status should be unaffected. An academic expert from the University of Melbourne Law School recorded that the decision announced in 1992 by the Australian Federal Government that limited partnerships would be taxed as companies had led to a dramatic fall in registrations.[113] The Chartered Institute of Taxation assumed in 1997 that the Inland Revenue would produce draft legislation, and stated that "the status of LLPs for tax purposes need thorough consideration before the enactment of the present proposals."

68. The 1998 paper set out briefly the intentions of Clause 10 of the Bill, and announced that a minor addition would be made to the draft Bill in relation to National Insurance. Unfortunately Clause 10 as drafted is almost self-evidently inadequate. It covers only the "Tax Acts". A number of respondents have set out in detail the tax treatment accorded to partnerships which may require specific reference in the Bill.[114] DTI accepted that the Clause was incomplete, and explained that -

"It was simply a question of when we were getting out the consultation in the timescale the further instructions had not gone into the finished product".[115]

While we appreciate the technical complexity of the issue, we are disappointed that the Inland Revenue should not have given this matter higher priority, given that 16 months elapsed between the end of the consultation process in May 1997 and publication of the draft Bill in September 1998. Some respondents have questioned whether what are seen as the tax advantages of partnership should without exception, as a matter of public policy, be passed through to LLP members. Mr Ward of the ICAEW suggested that, looking into the future, there would not be "any strong advantages" as between partnerships and companies.[116] It is desirable that the proposed extension to LLPs of the tax treatment currently afforded to partnerships be set out in sufficient detail to avoid any doubt as to which provisions are to apply, and to assist the legislature to arrive at a clear view as to whether there are any which should not apply.

Overseas LLPs

69. The 1997 paper proposed that overseas registered LLPs operating in the UK should be subject to the same requirements for public filing of information as GB LLPs, under regulations to be made by the Secretary of State.[117] Following objections from US law firms that such requirements were unfair and claims that US law firms would necessarily consider closing their offices if disclosure were required, the 1998 paper records variously that "it is not intended in the first instance to make [sic] such regulations before Parliament ... there is at this stage no intention to implement regulations for overseas LLPs. Any decision to introduce provisions for overseas firms will be subject to separate consultation ... There is no immediate intention to implement regulations for overseas LLPs ... ."[118]

70. We suspect that the intended target of the regulations designed to force disclosure on overseas LLPs was closer to home than international law firms registered as Californian LLPs,[119] and had more to do with Jersey than New Jersey. Any third party dealing with an evidently foreign registered entity can be expected to seek their own measures of consumer protection. The potential difficulty arises more over an inherently British firm which has chosen to register offshore. We would therefore be disturbed were the understandable concerns of US LLPs operating in the UK to delay measures intended to regulate British firms operating in offshore LLPs. We seek a clearer exposition from the Government of its intentions on Clause 13, and on the Inland Revenue's views on the taxation of offshore and genuinely overseas LLPs.

Designated members

71. The draft Regulations provide for the identification in the incorporation document of designated members, or for all members to be designated members. Such members are to be given several largely formal duties in connection with returns to the registrar normally carried out by a company secretary. The 1997 paper indeed stated that two or more members so designated "will fulfil a role analogous to that of a company secretary".[120] The much wider range of duties and responsibilities imposed on the directors of companies by and large fall on members of an LLP. The DTI confirmed in oral evidence that the designation of one or more members was "an administrative convenience", and that it was looking to go somewhat further in the light of comments received, but not so far as to establish designated members as "quasi-directors".[121]

72. Respondents to the 1998 paper have indeed made a number of suggestions of areas where responsibilities could more logically be placed on designated members rather than all members, while perceiving the possibility that, particularly in LLPs with few members, it may be appropriate for all members to be designated: or where provisions for authorisation by one member should more logically refer to the designated member or members. The APP suggested that it was unfair, and unrealistic, to impose on all members of an LLP "the duties and liabilities (in some cases strict) of officers of companies whose express responsibility is the management of the affairs of the company ...." and that these duties and liabilities should apply only to designated members.[122] Grant Thornton called for a greater clarification of the duties and responsibilities of designated Members.[123] The ICSA expressed concern that there was no requirement for the equivalent of a company secretary, suggesting that the existing role of a partnership secretary should be explicitly recognised in legislation, by an appropriately amended application of s286 of the 1985 Act.[124] KPMG suggested that designated members "might reasonably be equated with the Board of Directors of a limited liability company":[125] but the ICAEW in oral evidence made it plain that such an equivalence would not extend to the internal management of an LLP, and that a designated member should be the equivalent of an officer of a company.[126] PwC believed that designated members "could usefully fulfil the role of an officer of the LLP who may be held accountable for the LLP's failure to comply with any of its various procedural and administrative obligations".[127]

73. There is a consensus that more duties and obligations could usefully be "delegated" by an LLP's membership to designated members, in particular those functions statutorily or conventionally carried out by a company secretary. We do not however favour the idea that members of an LLP should feel less fully responsible for the general affairs of the LLP, than they would be as partners in a partnership. In cases of doubt as to whether to lay duties on designated members or all members, including the liability to fine in case of failure or default, the balance should tilt towards regarding all members as the equivalent of directors. Should they find such duties unduly onerous, the option of incorporation and employment exists. It cannot be right that LLP members should have all the benefits of unregulated internal management and none of the penalties thereof.

Disqualification

74. The 1997 paper stated that -

"In general the provisions of the Company Directors Disqualification Act 1986 will apply to members of LLPs and personal liability may ensue where the provisions of that legislation are breached."[128]

Paragraph 10 of Schedule 5 to the draft Regulations applies the 1986 Act (a consolidation measure) to LLPs by virtue of a new section 22C. It is not wholly clear to us that this provides, as we assume to have been the intention, for disqualified directors to be debarred from LLP membership and disqualified LLP members to be ipso facto disqualified directors. A clarification of that point would be helpful.

Employees

75. The documents issued by DTI make copious reference to the interests of partners, and to those doing business with partnerships: but little or no reference to the employees of partnerships, beyond those senior employees sometimes known as "salaried partners", and of the curious and possibly unintended proposal to give such employees some of the rights and liabilities of members.[129] But there is hardly a trace in the documents of the employees of the thousands of UK partnerships. We have no estimates of the numbers of such employees. Their employment status should not in theory be unfavourably affected by any change in status, since it would be covered by the general legal framework on the transfer of undertakings; nor should their ability to recover damages from a firm in the event of a breach of employment law, for example over discrimination or unfair dismissal or health and safety. Some doubt has however arisen over the extent to which an individual LLP member and/or the LLP as a body would be liable in such cases. The Association of Personal Injury Lawyers raised the issue of coverage under the Employers Liability Compulsory Insurance Act.[130] There may well be as yet unconsidered implications for the pensions and insurance provisions of partnership employees. The Department should set out the effect of the proposed legislation on employees, so as to satisfy Parliament that they would not be disadvantaged.

Europe

76. The DTI papers do not attempt to set the proposals in a European context, beyond the reference buried in the detail of the 1997 paper to the rather distant possibility that migrant continental professionals might form an LLP supervised by either an existing recognised professional body or indeed by one specially formed.[131] If, as we anticipate, there is no limitation on eligibility, there could be unintended attractions for citizens of other EU member states in registering a GB LLP. Some thought could usefully be given to avoiding in advance any danger of the status becoming an occasion for abuse. Nor is there any reference to the extent to which it meshes with the European Commission's continuing ambitions for jurisdiction in this field. There have in the past been efforts by the EU to extend the reach of the Fourth Directive to cover some partnerships, and indeed to seek a degree of harmonisation of liability systems, in the name of improving the internal market. The Commission now has a particular interest in small and medium sized enterprises. At the very least, Parliament would be assisted by some assessment of the extent to which European law could bear on the proposed LLP, and the prospects for it being used as a vehicle by those outside the UK.

112  1998, VI, p5 Back

113  1997, No.7 Back

114  Ev, pp11-12: CIT, para 3: E&Y, Schedule 2: KPMG, 3.1-3.6: etc Back

115  Q32 Back

116  Q95 Back

117  1997, 2.13 Back

118  1998, II, p5: I, 6.4: VI, p21 Back

119  Eg 1997, 105, submission by Gibson, Dunn & Crutcher Back

120  1997, 4.2, fn Back

121  Q43 Back

122  Ev, p19, 3.2.a.iv: also E&Y, p20 Back

123  1998, No.28 Back

124  1998, No 35 Back

125  KPMG, 6.7 Back

126  Ev, p39 & Q86 Back

127  PWC, Appendix A, 2.6-7 Back

128  1997, 3.5 Back

129  Ev, p 31 & Q 83;Ev, p 67,4 Back

130  1998, No 55 Back

131  1997, 6.2.23 Back