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Lord Goldsmith: My Lords, I welcome the amendment. I also welcome, and am grateful to the Minister for, the indication of the intention to revise the Explanatory Notes to deal with the other point that I made in Committee.

Throughout, my contributions to the debate have been from concern for the protection of third parties who deal with this new entity. I formed the conclusion that it was not technically possible to table an amendment as regards the personal liability of members, the point to which I referred in Committee. I do not repeat it. However, I believe that it is an indication, as is this amendment, of the need for people to know what they are dealing with.

On Amendment No. 9, the onus must be on the limited liability partnership to draw clearly to the attention of any third party a limitation on the authority of any member with whom it deals. That is

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why I welcome the amendment. It provides clearly that nothing less than knowledge on the part of the third party that the member did not have authority will do.

For the same reasons, at Second Reading I suggested that the courts should be vigilant to ensure that the device of the LLP was not misused. It should not be a trap for the unwary who may not understand that the body with which they are dealing, although it includes the word "partnership", is not the same as a partnership which carries with it personal liability and responsibility.

I am grateful to the Minister for having indicated changes that may be made to the Explanatory Notes. I support the amendment.

Lord McIntosh of Haringey: My Lords, I am grateful to my noble friend for his comments. Of course, it does not remove unlimited liability under all circumstances. That still exists when an act is in bad faith. However, my noble friend's general point is legitimate. I commend the amendment.

On Question, amendment agreed to.

Clause 10 [Income tax and chargeable gains]:

Lord McIntosh of Haringey moved Amendment No. 10:


    Page 5, line 27, leave out from ("section") to end of line 35 and insert ("118 insert--

"Limited liability partnerships

Treatment of limited liability partnerships.
118ZA. For the purposes of the Tax Acts, a trade, profession or business carried on by a limited liability partnership with a view to profit shall be treated as carried on in partnership by its members (and not by the limited liability partnership as such); and, accordingly, the property of the limited liability partnership shall be treated for those purposes as partnership property.
Restriction on relief.
118ZB. Sections 117 and 118 have effect in relation to a member of a limited liability partnership as in relation to a limited partner, but subject to sections 118ZC and 118ZD.
Member's contribution to trade.
118ZC.--(1) Subsection (3) of section 117 does not have effect in relation to a member of a limited liability partnership.
(2) But, for the purposes of that section and section 118, such a member's contribution to a trade at any time ("the relevant time") is the greater of--
(a) the amount subscribed by him, and
(b) the amount of his liability on a winding up.
(3) The amount subscribed by a member of a limited liability partnership is the amount which he has contributed to the limited liability partnership as capital, less so much of that amount (if any) as--
(a) he has previously, directly or indirectly, drawn out or received back,
(b) he so draws out or receives back during the period of five years beginning with the relevant time,
(c) he is or may be entitled so to draw out or receive back at any time when he is a member of the limited liability partnership, or
(d) he is or may be entitled to require another person to reimburse to him.

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(4) The amount of the liability of a member of a limited liability partnership on a winding up is the amount which--
(a) he is liable to contribute to the assets of the limited liability partnership in the event of its being wound up, and
(b) he remains liable so to contribute for the period of at least five years beginning with the relevant time (or until it is wound up, if that happens before the end of that period).
Carry forward of unrelieved losses.
118ZD.--(1) Where amounts relating to a trade carried on by a member of a limited liability partnership are, in any one or more chargeable periods, prevented from being given or allowed by section 117 or 118 as it applies otherwise than by virtue of this section (his "total unrelieved loss"), subsection (2) applies in each subsequent chargeable period in which--
(a) he carries on the trade as a member of the limited liability partnership, and
(b) any of his total unrelieved loss remains outstanding.
(2) Sections 380, 381, 393A(1) and 403 (and sections 117 and 118 as they apply in relation to those sections) shall have effect in the subsequent chargeable period as if--
(a) any loss sustained or incurred by the member in the trade in that chargeable period were increased by an amount equal to so much of his total unrelieved loss as remains outstanding in that period, or
(b) (if no loss is so sustained or incurred) a loss of that amount were so sustained or incurred.
(3) To ascertain whether any (and, if so, how much) of a member's total unrelieved loss remains outstanding in the subsequent chargeable period, deduct from the amount of his total unrelieved loss the aggregate of--
(a) any relief given under any provision of the Tax Acts (otherwise than as a result of subsection (2)) in respect of his total unrelieved loss in that or any previous chargeable period, and
(b) any amount given or allowed in respect of his total unrelieved loss as a result of subsection (2) in any previous chargeable period (or which would have been so given or allowed had a claim been made)."").

The noble Lord said: My Lords, Amendment No. 10 is horribly long and technical and makes heavy reading. (I was going to enter a bet to see how many people had read it!) For that reason, I shall deal with the amendment in instalments by reference to each of the four new sections that it proposes inserting in the Income and Corporation Taxes Act 1988.

The first new section is Section 118ZA of the ICTA. This section is largely the same as Section 111A of the ICTA that was previously inserted by Clause 10. The only change that has been made to that provision is to insert the words "with a view to profit" which we debated in Committee, after the requirement that an LLP must be carrying on a trade, profession or business if it is to be taxed as a partnership. In this way we are seeking to ensure that an LLP that is taxed as a partnership would otherwise have been capable of operating as a partnership under the 1890 Act.

As the effect of this clause is that LLPs will be taxed as partnerships I should like to take this opportunity to say something about this tax treatment. The limited liability partnership is a response to the desire, particularly from professional partnerships, for an entity which will allow them to operate with limited liability, while maintaining a partnership ethos--that is, the flexibility to organise their own internal structure, and to participate in the ownership and

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running of the business. For these reasons, such an entity may also prove attractive to start-up businesses, and to multi-disciplinary businesses. We concluded, in the light also of the views of the trade and industry committee, that it would be wrong to try to restrict this combination of limited liability and partnership structure to the professions, even if it were possible to find a satisfactory legal definition.

We have become aware, however, that taxing LLPs as partnerships might mean that there is scope for them to have alternative uses for which they were not intended, where the primary or only attraction may be their tax status. We shall be looking further into these issues with the Inland Revenue with a view to bringing forward legislation in the Finance Bill 2001, which should be in time for the availability of limited liability partnerships. Clearly, this will only be after appropriate consultation. There is no intention to undermine the commercial certainty of taxation as a partnership for those businesses for whom the entity was intended, and clearly this will be uppermost in our minds in whatever option we propose. I wished to put that on the record.

The next new section of the Taxes Act that is inserted by the amendment is Section 118ZB. This and the remaining aspects of this amendment make up the proposed amendment to which I referred at Committee stage, at col. 1395 of the Official Report of 24th January. The effect of the amendment is to make the provisions of the existing Sections 117 and 118 of ICTA applicable to members of LLPs with detailed modifications that I shall explain.

Sections 117 and 118 are anti-avoidance provisions that were introduced in 1985. They currently apply only to limited partnerships under the 1907 Act that carry on a trade. They operate to restrict tax relief claimed under specified provisions. Section 117 applies to individual partners; and Section 118 applies to corporate partners respectively. We propose that the extension of Sections 117 and 118 will apply only to claims made by members of trading LLPs and not claims by professions.

The reason that they are being extended to LLPs is that without doing so there would be the same scope as for the 1907 Act limited partnership for using LLPs as vehicles for tax avoidance. This avoidance would involve people buying into LLPs to claim tax relief for losses substantially in excess of their capital contributions; or interest could be artificially manufactured on loans to buy an interest in the LLPs and relief claim for that interest. The particular claims for tax relief by members of LLPs to which Sections 117 and 118 will apply are the same as the particular claims by partners in the 1907 Act limited partnerships. These are claims to tax relief against income other than profits from the trade of the LLP for interest paid on loans to buy into or provide working capital for the LLP and for trading losses of the LLP. There is no restriction by these sections of tax relief for interest paid or trading losses that are set against the partnership profit. Any amount by which the loss is restricted can be carried forward and set against the members' future shares of the LLP profits.

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The claims to these tax reliefs are limited by Sections 117 or 118 to a specified amount which, for limited partnerships, is the partner's capital contribution plus any undrawn profit. That limit would not have worked for LLPs which will be structured differently. Because of this, the new Section 118ZC, which this amendment inserts, defines the limit which reflected our policy of allowing claims by members in LLPs up to the amount of money that they stood to lose if the LLP was wound up because it was insolvent. The effect of this provision is to set a limit on claims based on any capital that the member has subscribed to become a member, plus any undrawn share of profit and any further amounts that he or she has undertaken to contribute in the event that the LLP is wound up. The provision includes certain conditions that ensure that relief cannot be obtained on the basis of money that has been temporarily lodged with or committed to the LLP and then withdrawn after the tax relief has been given.

The provisions of new Section 118ZD cater for the situation where a member of an LLP who has had a claim to loss relief restricted by Sections 117 or 118 later makes a further capital contribution. Where this happens, he or she can claim relief for any balance of the loss that was not relieved in the period of the original claim and has not, in the mean time, been set against the LLP's trading profit. This claim is made on the basis that the loss arose in the year of the further contribution. This provision was introduced in response to comments by the bodies which were consulted. I beg to move.


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