Draft Limited Liability Partnerships, Partnerships and Groups (Accounts and audit) regulations 2016

Lord Johnson of Marylebone Excerpts

Thursday 21st April 2016 General Committees

[The Minister for Universities and Science (Joseph Johnson)]

I beg to move,

That the Committee has considered the draft Limited Liability Partnerships, Partnerships and Groups (Accounts and Audit) Regulations 2016.

It is a pleasure to serve under your chairmanship, Mr Stringer. I am standing in for my right hon. Friend the Minister for Small Business, Industry and Enterprise, who is on urgent business in Brussels in relation to the steel sector, so if the Committee finds that I am being probed to the limits of my knowledge, I will rapidly agree to write to the Committee to supply it with any information that I am unable to give now.

The Government and business agree that we should act when there are opportunities to deregulate and lighten the load of legislation. Today we have the opportunity to do just that. These regulations will introduce largely deregulatory changes to the financial reporting requirements for limited liability partnerships. They will also introduce a lighter-touch, “micro-entities” financial reporting regime for the smallest LLPs and qualifying partnerships.

Last year, implementation of the accounting directive provided an opportunity to reduce burdens imposed by the financial reporting regime for companies, especially small companies. We have now turned our attention to other types of business entity, and it is clear that similar burden reductions could be applied to LLPs. Following our consultation on proposed changes for companies, a number of stakeholders in the accountancy sector asked whether the same requirements would be extended to LLPs. For accountancy firms and other businesses, the LLP structure has the advantages of a partnership—the relative simplicity of internal governance—with the legal protections of a limited company. High-profile businesses registered as LLPs include PwC Legal and KPMG.

We believe that the financial reporting regimes for LLPs and companies should as far as possible be aligned. That avoids the unnecessary complexity of having regimes for LLPs and companies with similar structures but differences in content. Our consultation on aligning the LLP financial reporting regime with that for companies received unanimous support from stakeholders, and we were encouraged to introduce the revised regime as soon as possible. I am particularly grateful for the contributions of the Institute of Chartered Accountants in England and Wales, the Financial Reporting Council and firms such as EY and Deloitte, to name but a few.

The regulations will amend legislation that applies much of the financial reporting regime for companies to LLPs. That includes application of provisions of the Companies Act 2006, as well as the supporting regulations that set out the form and content of accounts. The outcomes for business should be straightforward and easily understood, coming as they do on the back of changes to the financial reporting regime for companies.

What do the regulations actually do? I will now explain some of the detail of the proposed changes. The regulations will raise the thresholds for defining the size of LLPs, for the first time since 2008. That will enable about 400 medium-sized LLPs and 40 large LLPs to be re-categorised as small and medium-sized respectively. That means they will be able to access regimes that are more appropriate to their size.

The regulations will also introduce a micro-entities regime for the smallest LLPs and qualifying partnerships, thereby enabling about 3,500 of the smallest LLPs to access a much less burdensome financial reporting regime. Among other things, the micro-entities regime will permit greatly simplified accounts and exemption from the obligation to draw up notes to accounts. Other deregulatory changes include permitting small LLPs to prepare and publish abridged accounts if that decision has been unanimously supported by the members of an LLP. Those abridged accounts omit information required by the general formats in the regulations and will reduce the administrative burden on small LLPs.

It was announced in January that the Government had concluded that the audit exemption thresholds for companies should be allowed to rise in line with the accounting thresholds for small companies. The regulations will apply those increased company thresholds to LLPs, too. That will offer savings of approximately £2 million a year to LLPs. Increasing the threshold for audit will ensure that smaller LLPs are not constrained by a financial assurance regime that is more suited to larger businesses. However, this change will not remove the option for external audit if members, investors or creditors feel that is useful. Importantly, that exemption does not apply to LLPs involved in activities where users of accounts need a higher level of transparency, including where an LLP trades on a regulated market in a European Economic Area state or is involved in banking or insurance. The Government will monitor and gather evidence of the impact of the change to ensure that deregulation is not introduced at the expense of integrity. There will also be a full review by 2021 of the provisions amended by the regulations. We will respond if evidence indicates that action is required to address any shortcomings.

The regulations will not substantially change the way in which an LLP’s accounts are prepared and used, but they will achieve consistency across the UK’s financial reporting regimes for companies and LLPs and avoid unnecessary complexity for the users and preparers of accounts. The regulations potentially provide genuine deregulatory opportunities for LLPs. The vast majority—some 98%—of the UK’s 58,000 LLPs are small. They will be able to benefit the most from these deregulatory changes if they choose to do so, and the savings will support them in running their businesses and, I hope, finding new opportunities for growth. I commend the regulations to the Committee.

--- Later in debate ---

[Joseph Johnson]

I thank the Committee again for its understanding. I will do my best to answer the questions and if I fall short, I will happily supplement my oral answers with written ones.

In terms of the impact of reduced disclosure requirements on the ability of the smallest firms to raise finance, we will ensure that the abridged accounts none the less provide users with important and relevant information about the financial position of LLPs. If a lender wants more information before providing credit, they are always able to request it.

I certainly can confirm the Government’s commitment to review the arrangements. We will ensure that they are properly reviewed and monitored; post-implementation reviews are planned for 2020 for companies, and for 2021 for LLPs. We intend to use our work to inform the Commission’s reviews.

On the question from the hon. Member for Cardiff West about true and fair, the duty of the members of a LLP to approve only those accounts that are true and fair will remain unchanged. However, in the case of micro-LLPs, the accounting items included in their accounts will be presumed to give the true and fair view that is required. Although the regulations will allow some simplification of accounts prepared and published by LLPs, that will not affect the overriding duty to prepare true and fair accounts. The hon. Gentleman queried the time it has taken to bring these measures forward, but it has been necessary for the Government to meet EU obligations for companies to meet the transposition deadline. We are now mirroring that implementation for LLPs. On his linked question about 23 June and the referendum, LLPs are not directly subject to EU legislation, so we would not need to review the regulations unless we chose to do so.

My hon. Friend the Member for North West Hampshire asked about EU-adopted IFRS and FRS 102 rules. UK companies and LLPs have a choice about which regime to adopt. They will choose the regime that best meets their business needs. We have ensured that no company will need to make repeated changes to their arrangements by making this reduced regime available for financial years commencing on or after 1 January 2015 on a voluntary basis.

To answer my hon. Friend’s question on tax and quarterly updates or quarterly tax returns, the issue of quarterly updates for tax purposes is still under discussion. This is not about looking to change company reporting arrangements for annual accounts, but about looking to ensure that change does not increase burdens for business.

The hon. Member for Glenrothes spoke about the danger of lifting burdens for professional services. We will continue to work closely with business and professional bodies to monitor the impact of company law on the quality of financial information and take action to address issues identified as appropriate. The deregulation only relates to smaller-sized businesses.

With your permission, Mr Stringer, I will offer to provide written answers to the rest of the questions. The answers I need to give are detailed and I am not sure I will be able to communicate them effectively right here and now, but I will write to hon. Members later with your permission.

Lastly, I shall wrap up by saying that these regulations will not substantially change the way in which an LLP’s accounts are prepared and used, but they will achieve consistency across the UK’s financial reporting regime for companies and LLPs. The regulations are a positive step that has the support of stakeholders. They offer additional flexibility for LLPs and qualifying partnerships while ensuring that necessary protections are still in place. They will also meet the understandable desire of business for consistency in financial frameworks. Effective financial management underpins the success of every business. The Government remain committed to the good name of the UK’s accounting regime while maintaining reporting requirements that are proportionate and flexible. The regulations will support that objective.

Question put and agreed to.