James McGachie: Reform needed to keep financial reputation

Tax is an issue with many offshore-linked limited partnerships. Picture: John Devlin
Tax is an issue with many offshore-linked limited partnerships. Picture: John Devlin
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They have been around for more than 100 years, but until the last decade Scottish Limited Partnerships (SLPs) were generally only in use in private equity and investment funds, their tax status and corporate status viewed as attractive to those in legitimate financial activities.

Why, then, has there been a 239 per cent rise in registered SLPs in the past five years?

A 2001 Scottish Law Commission paper indicates 3,500 SLPs in existence at that time. That number is now believed to be in excess of 25,000, with many controlled far from Scottish shores.

As a litigator, the use of SLPs first came to my attention in 2012 when I was approached by a software developer which discovered its gaming app was illegally copied and available on a pay-per-play basis on social media.

The infringer was an SLP, with no known assets within this jurisdiction other than a letterbox in Leith.

A search at Companies House found nothing other than the names of two companies who acted as the SLP’s partners, with no contact details or other information as to where they were based.

With the help of our Kiev office, I found the partners were both offshore with links to the Marshall Islands, Moldova and Ukraine. ­Having any Scottish court judgement recognised, let alone enforced, would be difficult.

Thankfully, the proceedings had a successful outcome. While the SLP’s controllers remained elusive, judgement against the SLP resulted in social media platform removing the app and its profits ­given to my client.

What made the SLP attractive to such offshore companies? The answer most likely lies in limited reporting obligations applicable to SLPs and their unique corporate status.

Under Scots law, an SLP is considered a corporate entity, able to sue (and be sued) and enter contracts, albeit without any need to lodge accounts when one of the partners is overseas. The SLP is ‘tax transparent’ – HMRC only taxes profits in the hands of the partners, in contrast to a company, which is subject to its own tax obligations.

An SLP controlled from abroad enjoys the same limited liability protection of a Scottish limited company but without the usual requirements to lodge annual accounts or pay tax on its own income.

Trying to unravel the true ownership may ultimately require a round-the-world trip, often involving jurisdictions where governance and reporting obligations are limited in comparison to the UK.

The UK Government’s call for evidence in respect of its Review of Limited Partnership Law, which is open until 17 March, is welcome. Legitimate use of limited partnerships should not be deterred. However, harmonisation across the UK may be beneficial and close loopholes.

Targeted reform of the existing legislation would go some way to arresting the fallout from scandals which SLPs have been recently linked with and hopefully avoid any erosion of confidence in Scotland’s reputation as a financial services hub.

James McGachie is a Legal Director within DLA Piper’s Litigation and Regulatory ­practice, based in the firm’s Edinburgh office.