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Mr. Burnett: When the Minister considers tax neutrality, I hope that he will refer to the possibility of limited liability companies becoming llps. Will he also confirm that, when he says that the transfer of a business or partnership into an llp will be tax neutral, it includes stamp duty?
Dr. Howells: I shall find out by the end of the debate. I believe that the provision includes stamp duty, but I shall confirm that later. Although I appreciate that the hon. Gentleman understands the purpose of the Bill, his initial and follow-up questions suggest a misunderstanding. I do not expect the Bill to be especially useful to incorporated businesses because they already have limited liability and have already organised themselves as a company. There is no reason for them to organise themselves into llps, which will be taxed as partnerships while companies are taxed as companies. I envisage no reason for, or easy way to make, the transformation of a company into an llp tax neutral.
Mr. Burnett: Members of a limited company might want to become an llp for good tax reasons.
Dr. Howells: That would be up to different companies. We hope to provide a new vehicle for companies and business; clearly, the decision would be up to them.
Another amendment was made to ensure that members were treated for national insurance purposes as if they were partners in a partnership. Although we believe that it is right to tax llps as partnerships, we are aware that the tax treatment may allow scope for llps to be used when the primary or only attraction of llp status is tax treatment. I sense that the hon. Member for Torridge and West Devon was hinting at that when he spoke. Clearly, that is not intended. We shall consider that issue carefully with the Inland Revenue and, depending on our conclusions, measures may be introduced in the 2001 Finance Bill. The Revenue will consult widely on its intentions. It is important to emphasise that we do not intend to undermine the commercial certainty of llps' taxation treatment for those businesses for which llp status was intended. That will be at the forefront of our minds, whatever options are proposed.
Apart from those on tax, several amendments were made in the other place, the most notable of which included clarifying that an llp's members will not be its employees and putting it beyond doubt that, if an llp
member were liable to a person for a wrongful act or omission in the course of the llp's business, it would be liable to the same extent as the member.We intend to apply secondary legislation to llps, which will include similar requirements to those for companies; it may be useful if I touch on what that will mean. The regulations will include a requirement for financial disclosure equivalent to that required of companies, provision that members of an llp can be sued for wrongful or fraudulent trading and provision that members can be disqualified from being members of an llp and a company director. The regulations will apply, with appropriate modifications, the provisions of the Insolvency Act 1986. Those modifications include a measure that will deter members from siphoning off funds to the detriment of creditors.
We have published the draft regulations for consultation twice--in September 1998 and July 1999. We shall amend the regulations to take account of the concerns expressed by consultees and by Members of another place about the disapplication of partnership law to llps. That is part of considering how far we treat llps as partnerships and how far we treat them as companies. As a result, we shall include a default provision that will apply if there is no llp agreement or if the agreement does not cover a particular issue. The draft proposals were consulted on and generally welcomed by those who responded.
It might be suggested that a significant weight of legislation will be applied to such an entity and it would be understandable if hon. Members asked whether a lighter touch were preferable. The hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) knows full well that I am very much in favour of a lighter touch. However, I would argue strongly that we shall provide for an entity that will have the privilege of limited liability and we must ensure that a balance is struck between the interests of business and an llp's potential clients. Becoming an llp will be a purely voluntary and commercial decision. Any firm that chooses to become an llp and wants limited liability will compare the llp with a company. Anyone who makes that comparison will find that the regulatory requirements applied to an llp are not unreasonable.
The Bill has benefited from the careful and measured attention of learned consultees, learned Members of another place and the Trade and Industry Committee. As a result, we have achieved the right balance in creating a new entity that combines limited liability with the organisational flexibility of a partnership while ensuring that appropriate safeguards are applied to protect those who deal with the entity. I am pleased to commend the measure to the House.
5.19 pm
Mr. Nick Gibb (Bognor Regis and Littlehampton): I declare an interest. Actually, it is not really an interest; it is more a confession: I am a chartered accountant. Some of my best friends are chartered accountants. Many of my friends work for chartered accountancy partnerships. I worked for such a partnership for 13 years before entering the House.
The Bill is welcome. It started life under the last Conservative Government in response to concerns, particularly from the accountancy and legal professions,
about the difficulties of unlimited liability. The prospect of losing one's house and savings because of the negligence of a fellow partner whom one may not even have met in a larger partnership was becoming a huge impediment to recruiting and retaining key personnel.
Mr. Austin Mitchell (Great Grimsby): I am sure that the hon. Gentleman will go on to paint the tear-jerking spectacle of those in accountancy partnerships living in terror in case their yachts, farms, pubs and holiday retreats are suddenly confiscated, but has it ever happened? We estimate that the total revenue set aside from the fee income for contingency claims was no higher than 2.7 per cent. Most of the things that are claimed to be a threat over accountancy never materialised.
Mr. Gibb: It has happened in the United States. A number of medium-sized firms have got into severe difficulties and partners have lost their personal assets, but it is the fear of losing, through no fault of their own, assets for which people have worked all their lives that is wrong. It also has an unhealthy effect on the working method within the firms. People might argue, as the hon. Gentleman no doubt would, that the prospect of losing everything if one does poor-quality work for a client concentrates the mind wonderfully and so increases the quality of work. My experience is that the determination to keep clients is the driving force behind doing good work. The fear of negligence action acts as a dampener on the work.
Letters giving advice are packed full of caveats and disclaimers. Sometimes it is barely possible to discern the actual advice that the letter seeks to give. Huge resources are pumped into ensuring that terms of engagement are correctly documented and filed, not to improve the quality of the work, but to safeguard the firm in case of legal action. That is the consequence of the ever-present threat of legal action.
Even under the Bill, it will still be possible for partnerships to be sued, but the prospect of partners unconnected with the negligence losing everything will go. It is wrong that, in circumstances where--the Minister alluded to it--99 per cent. of the blame for something going wrong attaches to, say, the impecunious fraudulent director of a company, and the audit firm or solicitor can be shown to be just 1 per cent. to blame for what went wrong, they can be sued for 100 per cent. of the loss. Because many of the partnerships have deep pockets, it is to those firms that aggrieved investors turn for recompense.
The general legal concept of joint and several liability will not be changed by the Bill, but the concept and joint and several liability within a partnership will. The limited liability partnership will be suable for breach of contract to the full extent of its assets. The partner responsible for any negligence will, as the Minister said, be liable under tort, but the remaining partners will be able to sleep easy at night knowing that their personal assets will be safe.
The Bill has been through an enormous number of stages. The last Conservative Government issued a consultative document in February 1997. A draft Bill
issued by the present Government in September 1998 was scrutinised by the Select Committee on Trade and Industry. The Government issued a new draft in July last year and a final Bill came out in November. Despite all that pre-legislative scrutiny, during which many of the less attractive options were dropped, the Bill that went to the other place still had a number of problems.Conservative Members were concerned that the Bill provided no default mechanism to the existing body of partnership law in circumstances where the partnership agreement is silent: for example, the right to share in capital and profits, the right of a member to take part in the business, procedures for retiring as a member and procedures for holding and calling meetings. We believe that there should be a default mechanism, so that those rules are covered.
We were concerned about the inherent ambiguities that could enable partners or members to be regarded by the Inland Revenue as employees of the llp. We were concerned about the absence of any definition of "designated member". There are plenty of subsections about the appointment of designated members and the requirement for two such members, but no mention of what they are meant to do.
We were concerned about the inadequacy of the taxation provisions. The Bill is meant to be tax neutral, as the Minister said, but, before it went to the other place, there was no clarity over whether transferring a partnership to an llp would trigger a tax charge on the cessation of the old partnership. There is no mention of stamp duty consequences. We had enormous concerns about the insolvency provisions, which appeared to apply much stricter tests on trading while insolvent than similar provisions applicable to companies. We were concerned about the acquisition accounting requirements that llps would automatically be required to adopt. As hon. Members will clearly understand, that method of accounting for the merger of two llps would be absurd given that they do not issue shares.
All those issues were raised in the other place by my noble Friend Baroness Buscombe. Thanks to her effort--and, one must acknowledge, to the reasonable approach of the Minister, Lord McIntosh--those concerns were largely taken on board and substantive amendments were made in Committee. We have always said that, as an Opposition, we will say it as it is. If the Government do the right thing, we will say so; if they do the wrong thing, we will oppose them. This is a good Bill--much better, it must be said, thanks to my noble Friend's scrutiny--but one or two loose ends and remaining criticisms need to be aired, to which we can return in detail in Committee.
Far too many key provisions are hidden in secondary legislation. From the now 19 clauses and one schedule, one would have no idea of some of the Bill's basic tenets. One would have no idea that a member of an llp will remain liable to the full extension of his personal assets, notwithstanding the limited liability, for negligent work that he or staff reporting to him had carried out; no idea about a host of important issues relating to the legal position of members if the llp trades while insolvent; no idea about which company law and which partnership rules will apply to the llp. Those matters are in a host of regulations to be issued under sections 14, 15 and 16.
The Trade and Industry Committee was highly critical of the degree of use of secondary legislation in the Bill. Its report states:
- There does not at first sight seem to be any over-riding reason why the Regulations and schedules should not be incorporated into the Bill . . . We would . . . far prefer that the detailed secondary legislation proposed be incorporated in the Bill.
Lord Goodhart, a Liberal Democrat peer, said in the other place:
- The Delegated Powers and Deregulation Committee in your Lordships' House, of which I am a member, accepted the Government's proposals to put these provisions in regulations. But it seems to me that this comes close to the borderline and the more I look at some aspects of this Bill the more doubtful I am whether the Delegated Powers Committee was not rather too lenient.--[Official Report, House of Lords, 9 December 1999; Vol. 607, c. 1438.]
- a Henry VIII provision which allows regulations to amend or repeal primary . . . legislation.
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