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Baroness Buscombe moved Amendment No. 32:


The noble Baroness said: I beg to move.

On Question, amendment agreed to.

Lord Goodhart moved Amendment No. 33:


    Page 4, line 42, at end insert--


("(5A) If a limited liability partnership fails to comply with subsection (1), the person who becomes or ceases to be a member or designated member or whose name or address has changed may deliver notice to the registrar.
(5B) Any person who delivers a notice under subsection (1) or (5A) which is materially incorrect shall be guilty of an offence unless he had reasonable grounds for believing the notice to be correct.").

The noble Lord said: This is a short point. It is clearly desirable that a former member who ceases to be a member of an LLP should be able to dissociate himself as quickly as possible from his membership. One way in which that is done--an important method--is by having his name removed from the membership list on the register. As now provided under Clause 9, that notice may be given only by the LLP itself. The LLP may, particularly if there is a membership dispute or if the administration of the LLP is in some degree of chaos--which may happen with small organisations--either refuse or fail to give the necessary notice. As the Bill now stands, a former member who wishes the fact that he has left the membership to be recorded on the register would have to go to court to seek an injunction ordering the LLP to give the necessary notice. That would involve time and money, and it would surely be better to give the former member the right to give notice himself personally if the LLP fails to do so.

There is, of course, a risk that someone might give notice of retirement when he was in fact not entitled to retire. The second half of the amendment is intended to cover such a situation, where the proposed amendment to the register is known to be incorrect. I added the words "materially incorrect" to exclude problems with minor errors such as an incorrect postcode given on a change of address. There is nothing more that I can say on the matter; it is a short point, which I ask the Minister to consider. I beg to move.

Lord McIntosh of Haringey: I certainly do not feel strongly about that as an issue of principle. The amendment creates a requirement for an LLP additional to that placed on companies. Under company law, when the details of a director change, the company has the responsibility for informing the

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registrar. In situations of default, the company and officers are in default and liable to a fine. There is no expectation that the director whose details change needs to inform the registrar and face the risk of a fine if the information is materially incorrect.

If we were to allow a member to inform the registrar of changes there might be confusion both within the LLP and with the registrar, as a member is unlikely to be aware whether or not a registrar had been notified. Therefore, the same notification could go to the registrar twice and a situation could arise where the registrar did not know which to believe; for example, if a member left the LLP and informed the registrar of the fact when the LLP had already done so. That could result in additional work for the registrar and confusion for the outside world. As I said, I do not feel strongly about the matter, but, if the noble Lord has a point, it is one which applies to company law more generally. Since it is not an urgent point, it might be as well for it to be included in the company law review rather than introduced separately for LLPs and not for companies.

Lord Goodhart: I thank the Minister. I accept that this is not the most important amendment that we are discussing today, but it is not right to treat LLPs and ordinary companies on the same footing here, because there is a distinction between membership of a company and directorship in the case of ordinary companies which does not apply to LLPs, where membership and directorship are a single combined function. In those circumstances I believe that there is a justification for treating LLPs differently from directorships. Indeed, there may be cases where a member is more anxious to dissociate himself from a company than a director would be. However, certainly for today I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No.34 not moved.]

Clause 9, as amended, agreed to.

Clause 10 [Income tax and chargeable gains]:

Lord Lucas moved Amendment No. 35:


    Page 5, line 6, after first ("partnership") insert (", or any other activity or function of such a partnership,").

The noble Lord said: In moving the amendment I shall speak also to Amendments Nos. 37 and 38. When I discussed the Bill with the Minister in his office, we covered the subject of tax transparency. Certainly in the publicity about the Bill it has been said to be a vehicle which is tax transparent. However, in the wording of the Bill, the tax transparency is limited to that which a partnership would have because it is limited in the same way as is a partnership to the carrying on of a trade or business.

I discussed with the noble Lord why that might be and what problems that might create; for example, if a large limited liability partnership sold its trade and was

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left with various assets which were then disposed of, it was said--I believe quite rightly--that that would be very much a borderline case. It was said also that under those circumstances there would be an argument for the limited liability partnership to trip into tax intransparency and become liable to tax on its own account. In addition, it was said that circumstances existed where that kind of transformation would be desirable, such as in the compulsory winding-up of a limited liability partnership. In those circumstances, it would be better if the partnership were dealt with as an entity on its own and subject to its own tax rather than continuing to refer to the members, because they, in a way, would have ceased to be associated with the partnership.

As I said before, I have an interest in seeing whether we can make this a suitable vehicle for venture capital partnerships. Certainly the role of partners who do not undertake the active management of the individual investments in such partnerships is on the borderline between trade and investment. If those partners are going to use this type of provision--which, I believe, would be worth while from the point of view of the United Kingdom economy--it seems undesirable that they should be left in the rather unattractive hinterland between tax transparency and no tax transparency.

Admittedly from a relative state of ignorance, I see no difficulty in expressing the tax transparency the other way round. With these amendments, I have sought to ensure that this is a tax-transparent vehicle except in certain circumstances. Amendment No. 38 serves to illustrate a particular exception which would provide circumstances under which the vehicle was not tax transparent. It seems to me that members, whether of an accountancy firm or of a venture capital partnership, could rest easy knowing that that was a tax transparent vehicle, that they would pay tax as it was due on them through the limited liability partnership, and that they would not suddenly wake up to find that a tax inspector somewhere had decided that they were no longer trading and that under those circumstances the whole tax treatment of their investment had changed. I beg to move.

7.15 p.m.

Lord McIntosh of Haringey: I have two kinds of difficulty with these amendments. One is a technical difficulty and the other is a difficulty of principle. I shall deal first with the difficulty of principle. The purpose of the Bill as a whole is to ensure that businesses which are currently carried on in partnership can continue to carry on those activities without the disadvantage of unlimited liability. The amendment would mean that activities which cannot be carried on in partnership would be able to be carried on through the medium of an LLP. Therefore, they go beyond the scope of the policy that was behind the introduction of the Bill. The noble Lord has been quite open about that point in saying that he is interested in opening up the matter to venture capital partnerships and, I believe, also to property. I believe that he said that at an earlier stage. I may be wrong.

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I do not believe that the noble Lord was present when we debated the earlier part of the Bill this afternoon. We carried Amendment No. 5 to Clause 2. The definition of the purpose of an LLP is,


    "carrying on a ... business with a view to profit".

That is more explicitly in line with the provisions of the 1890 Act than it was before. I am afraid that what the noble Lord proposes in the amendment would extend the availability of LLPs beyond that which was originally intended with partnerships. Therefore, that is the difficulty of principle.

There is quite a big technical difficulty. As Clause 10 is currently drafted, the special tax treatment of LLPs as though they are a partnership is given only when the LLP carries on a trade, profession or business. When those conditions are not met by an LLP, it will be taxed as though it was a company. The amendments would have the effect that LLPs were taxed as partnerships, irrespective of the activities that they carry on. However, they could then encounter the technical difficulties which I shall set out.

From the point of view of calculating and collecting tax, there would be no difficulty. But taxing LLPs as companies is undesirable to those who believe that they may wish to set up LLPs, and we have agreed to tax them, for the most part, as partnerships. However, the reason that there are no technical difficulties in taxing an LLP as a company is important. That is because, by and large, companies can receive any type of income, and the Taxes Acts have evolved to be sufficiently flexible to deal with that. But Taxes Acts have evolved differently to tax partnerships established under the Partnership Act 1890. Because of the way that that Act defines partnerships as,


    "the relationship that exists between persons carrying on business in common with a view of profit",

that, with some updating of wording, is what is now in Clause 2. The Taxes Acts have evolved to tax the income, and only that income, that can arise from such a partnership. As a result, the Taxes Acts provide for the taxation of income received by partnerships from carrying on businesses, which is a wide term that includes trades or professions.

Therefore, it we accepted the amendments, the Taxes Acts would have to be extended (by amendment through this Bill) to provide for taxing partnerships that had been established for purposes beyond those for which they currently cater. We should need to have a special tax regime for LLPs based on that for partnerships but covering non-business LLPs and their non-business activities. That would not be easy. We should need to identify, and probably widen, all the current Taxes Acts provisions that deal with partnerships. In addition, further tax rules for non-business LLPs might need to be created.

I do not want to claim administrative convenience as my only objection to the amendment. However, it is quite a serious objection. I believe that such a provision would make a lot of money for professionals

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in interpreting it and would involve much time for parliamentary counsel in framing it. Therefore, I rely rather on my objection of principle.


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