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Jersey The Fall-Guy In New UK LLP Corporate Format

Jeremy Hetherington-Gore, Tax-news.com, London

24 July 2000

Last week saw the culmination of a long-running and sometimes lurid drama when the UK Limited Liability Partnerships Act 2000 received Royal Assent.

The Act introduces into the UK a corporate format which is routinely used in the US and many offshore jurisdictions to provide tax transparency to US investors but which was hijacked by the major UK professional firms when they began to feel pressurised by growing liability judgements ten years ago.

The members of an LLP have limited liability, even though they operate through a partnership. As enacted in the UK, however, LLPs will have to file accounts on the public register, and the entity can be sued for wrongful and fraudulent trading. Creditors can look through the limitation of liability in such cases, and members who behave badly may face disqualification as is the case for company directors.

The big professional firms have thus not got what they wanted, and may well not make use of the new legislation. They already had the Companies Act 1989, under which they could have chosen to trade as limited liability companies, a vehicle which offers considerable protection to both negligent and non-negligent partners. As now enacted, the LLP offers some personal protection to non-negligent partners only.

So what went wrong for the big professional firms? Basically, they persuaded Jersey to introduce LLPs, intending to force the UK government to copy Jersey by threatening to leave if LLPs weren't introduced in the UK. But the Jersey authorities smelled a rat, and the eventual Jersey legislation was a half-way house which has failed to attract any UK professionals. The row which accompanied the Jersey process led indirectly to the Edwards Report and considerable bad feeling between the Jersey and UK authorities.

At first the UK LLP format was intended to be available only for professionals, but in the course of debate its scope was extended to virtually all types of business. Unfortunately the audit requirement and the introduction of much corporate law into the partnership format makes it unlikely that small traders will want to use the new form.

The Limited Liability Partnership, UK-style, may therefore wither on the vine, despite its apparent attractions. A truly Phyrric victory for the professional fat cats.

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