|Draft Limited Liability Partnerships Regulations 2001 Draft Limited Liability (fees) Regulations 2001
Mr. Burnett: As the Minister knows, Opposition Members are anxious to have underlying legislation that is based on partnership, but the Government have gone towards corporate, Companies Act legislation. Certain events will not be catered for, especially in the case of oral agreements to create limited liability partnerships. In the light of the fact that in part VI on default provisions the Government have drawn heavily on section 24 of the Partnership Act 1890, can the Minister hazard a guess on whether, where there are lacunae, the courts will be minded to look to historical partnership cases or company law cases?
Dr. Howells: I think that they certainly will have that flexibility. They will look carefully at the matter. As I have tried to emphasise, this is a completely new vehicle for business. The consultation document published in February last year set out regulatory provisions modelled on section 24 of the Partnership Act 1890, and made it clear that the provisions would apply only where there was disagreement. They deal with specific arrangements that are arrived at by the partners within the limited liability partnership. Should circumstances arise in which there is neither agreement nor regulatory default provision covering the matters that have arisen, the courts will be expected to make a decision with regard to the nature of the entity. I hope that that reassures the hon. Gentleman.
Mr. Burnett: I am grateful to the Minister for addressing the point. Some practitioners are concerned by the possibility of events arising that are not covered by part VI where a limited liability partnership agreement either does not exist or is inadequate so that there are lacunae. In such a dispute arises, where does the Minister think that the courts will direct themselves? To what body of case law will they refercompany law cases or partnership law cases?
Dr. Howells: It is not necessary to differentiate because the court will have regard to partnership and to company law so that default provisions will be interpreted within the corporate context. As I have been trying to say, this is a new corporate vehicle.
The provisions are modelled on section 24 of the Partnership Act 1890 and were the subject of a specific consultation in February 2000. They provide an important safety net by introducing certainty where no LLP agreement exists. On taxation, I said earlier that I would confirm the Government's approach to the taxation of LLPs. They are a new business structure and their tax treatment is an important factor for businesses that are contemplating using them. I recognise the importance that business attaches to certainty when planning ahead. There has been consultation over a long period to ensure that the tax treatment of LLPs balances the desires of business with the need to guard against tax loss.
The Inland Revenue sought views before the Bill was introduced, during its parliamentary stages and most recently in the pre-Budget report. The Inland Revenue also published a helpful article in the December issue of its publication ``Tax Bulletin'' which gave guidance on how trades and professions using the LLP structure would be taxed. The article was drawn up with the help of consultees and covers points that were made during the consultations.
More recently, the Inland Revenue last week published a Budget note on the taxation of LLPs. In summary, the Limited Liability Partnerships Act 2000 introduced new sections into tax legislation to the effect that an LLP carrying on a trade, profession or business with a view to profit would be taxed as a partnership. Those tax rules enable existing partnerships to convert to an LLP without prohibitive tax implications. In particular, we wish to enable professional firms organised as traditional partnerships to convert to LLPs without either tax penalty or tax saving. We recognised that the LLP structure might be attractive to businesses other than the professions, so LLPs are available to all businesses. However, it has never been our intention to allow the formation of LLPs to be driven by their tax treatment or to open up the likelihood of a significant loss of tax revenue.
The review of tax treatment that I announced during proceedings on the Limited Liability Partnerships Bill identified the use of LLPs as property investment vehicles as opening up significant scope for tax loss. By ''property investment vehicle'', I am referring to a business consisting wholly or mainly of the making of investments in land or buildings. The tax loss would arise if tax-exempt bodies, such as pension funds or the pension business of life insurance companies, and tax-exempt businesses of friendly societies were to invest in property via LLPs, instead of through property investment companies. The proposals on property investment outlined in the pre-Budget report and confirmed in the Budget note are designed to prevent such a tax loss and to avoid creating distortions in the investment market. Let me emphasise that they do not restrict what businesses LLPs may choose to carry on, and they will not be relevant to the vast majority of businesses contemplating using LLPs. Also, the proposals will not affect the current arrangements used by pension funds, so there is no question of tax proposals removing a tax break that is currently enjoyed. Of course, as primary tax legislation, the proposals will be subject to parliamentary scrutiny.
LLPs are a new business entity. It is only prudent, therefore, that the Inland Revenue keep the use of LLPs under review. If there are situations in which their use is motivated by, or is likely to lead to, significant tax loss, we will consider the need for appropriate legislation.
I turn now to the fees regulations for LLPs. Companies House is responsible for registering the incorporation and dissolution of companies and for publishing information supplied in compliance with the provisions of the Companies Acts relating to disclosure of financial and other information about the company and its officers. The Limited Liability Partnerships Act 2000 gives Companies House similar responsibilities for LLPs.
The Committee will see that the registration fee for LLPs is set at £95, somewhat higher than that for companies. I should explain why.
Mr. Nick Gibb (Bognor Regis and Littlehampton): Will the Minister give way?
Mr. Burnett: Will the Minister give way?
Dr. Howells: I will give way to both hon. Gentlemen in a moment. We do not expect, especially in the first few years, that the demand for LLP incorporation will be as high as for company registrations. Market research carried out by Companies House suggests that initial volumes will be much lower than for companies: the forecast is for some 8,000 LLPs over the first three years, although that is subject to considerable uncertainty. However, the administration of the new LLP regime requires the creation of a dedicated team within Companies House. The fees charged for LLPs must recover the associated costs, including the costs of developing the necessary computer systems and the provision of LLP information to the public. As a result, a reasonable calculation of the expected unit costs for the registration of an LLP gives a registration fee of £95.
Mr. Gibb: Is the Minister's copy of the draft regulations different from the one that I have? I saw the figure that he quoted on the Companies House website, which said that it was subject to change, but the copy of the regulations that I received from the Vote Office says that the registration fee for a limited liability partnership is £130, not £95. Which figure is correct?
Dr. Howells: The figure that I have just given is correct. I give way to the hon. Member for Torridge and West Devon (Mr. Burnett).
Mr. Burnett: I was going to ask the same question, so I thank the Minister for his assurance that the correct figure is not £130, but £95.
Dr. Howells: I am glad to confirm that again.
Compared with our projections for the number of LLPs likely to register over three years, there are 1.4 million active companies and 200,000 new company registrations per year. That brings substantial economies of scale and accounts for the much lower company registration fee of £20. However, Companies House cannot cross-subsidise LLPs from the money received from the registration of companies. Companies House has been an executive agency since October 1988 and has operated as a trading fund since 1 October 1991. As such, it must recover the costs of providing its services from fees and aim to achieve a net return of 6 per cent. on its assets, on average taking one year with another.
Within that framework, Companies House must also avoid, as far as possible, cross-subsidy between its various activities. Thus, each major product and service category has to be broadly self-financing. As I said, it must also finance from fees and charges its continuing development programmein particular, the costs of continued investment in new IT systemsand those costs must be charged to and spread across the relevant components of Companies House products and services.
As part of the Government's modernising and e-commerce agenda, Companies House is putting a great deal of effort into systems that will, for example, make electronic incorporation and filing more easily accessible over the internet. At the same time, it is putting the final touches to a project to make available electronically all information that is held; information up to five years old is already available electronically. From the beginning, the users of information on LLPs will benefit from the changes and, later, there will be equal benefits for LLPs registering information electronically and on-line.
As a Department of Trade and Industry agency and training fund, Companies House is set strict public targets, among which is the requirement to recover its operating cost from the fees that it charges for its services. In that way, it is self-financing and makes no demand on the public purse. It has tried year by year to reduce the unit costs of processing information, which have declined by almost 20 per cent. in real terms over the past four years. The result is that the fees for the incorporation of companies and registration of returns are exceptionally modest. Inevitably, the proposed fees for LLPs are higher for all the reasons that I have given, but, in the longer term, I expect that the systems for capturing, holding and disseminating information on both companies and LLPs will come together. We can then look again at the relative levels of fees, but I hope that I have explained why the fees for LLPs in the regulations are reasonable and reflect the expected cost of Companies House administration.
The two sets of regulations undoubtedly add a fair number of pages to the legislation on LLPs; I have a chunk of them in my hand. However, the main LLP regulations follow closely from the drafts that we exposed for consultation both before and during the passage of the Limited Liability Partnerships Act 2000. Some might say that we should have adopted a more minimalist approach, but the regulations strike a balance between the interests of those wishing to form LLPs and of those who have dealings with them. I believe that the balance is right and I commend the regulations to the House.
|©Parliamentary copyright 2001||Prepared 13 March 2001|