Limited Liability Partnerships, Partnerships and Groups (Accounts and Audit) Regulations 2016

Earl of Courtown Excerpts

Wednesday 27th April 2016 Grand Committee

Moved by

[The Earl of Courtown]

That the Grand Committee do consider the Limited Liability Partnerships, Partnerships and Groups (Accounts and Audit) Regulations 2016.

[The Earl of Courtown (Con)]

My Lords, regulation on financial reporting has an immediate impact on businesses and those who prepare and make use of their accounts. I am sure that noble Lords will agree that legislation should enable trust and transparency for users of accounts without imposing disproportionate burdens on business. These regulations will introduce largely deregulatory changes to financial reporting requirements for limited liability partnerships. They will also introduce a lighter touch regime for the very smallest LLPs and qualifying partnerships that qualify as microentities.

Last year’s implementation of the accounting directive gave us an opportunity to reduce burdens imposed by the financial reporting regime for companies—especially for small companies. Having completed transposition of the accounting directive, we were able to turn our attention to other types of business entity, and we wish to introduce similar changes for LLPs. This was also the wish of stakeholders in the accountancy sector, who raised the issue of LLPs when consulted on the proposed changes for companies. It is not surprising that these stakeholders take an interest in the financial reporting requirements for LLPs. For some accountancy and legal firms and other businesses, the LLP structure has the advantage of a partnership—that is, the relative simplicity of internal governance—with the legal protection of a limited company. High-profile businesses registered as LLPs include PwC Legal and KPMG.

The UK’s approach has been that, as far as possible, the financial reporting regimes for LLPs and companies should be aligned to avoid unnecessary complexity. Last year, we consulted on our proposals to align the regimes for companies and LLPs. This approach was unanimously supported at consultation. As part of that consultation, the Government were also encouraged to introduce these regulations without delay, so that eligible LLPs could benefit from the burden reductions at the earliest opportunity. The majority of stakeholders who responded included those with practical experience of accounts—I am grateful for the contribution of the Institute of Chartered Accountants in England and Wales, the Financial Reporting Council and firms such as Ernst & Young and Deloitte, to mention a few.

The regulations before us will amend legislation that applies much of the companies financial reporting regime to LLPs. This includes secondary legislation that applies provisions of the Companies Act 2006 to LLPs and associated regulations relating to the financial reporting framework for companies. The outcomes for business should be straightforward and easily understood, coming, as they do, on the back of changes to the companies regime.

I will now explain some of the detail of these changes. The regulations will raise the thresholds for defining the size of LLPs for the first time since 2008. This will recategorise around 400 medium-sized LLPs as small, and around 40 large LLPs as medium-sized, which will enable them to access regimes more appropriate to their size. The regulations will also introduce a microentities regime for LLPs and qualifying partnerships, to mirror that made available to companies. It will enable about 3,500 of the smallest LLPs to choose to access a much less burdensome accounting regime. Among other things, the microentities regime will provide a greatly simplified balance sheet and profit and loss account. It will also largely exempt many LLPs from the obligation to draw up notes to accounts.

Other deregulatory changes include permitting small LLPs to prepare and publish abridged accounts. These are accounts whose formats omit information currently required by the general formats. However, abridged accounts will be possible only where the decision has been unanimously supported by all members. In January, it was announced that audit exemption thresholds for LLPs will rise in line with the increased thresholds for accounting. This is consistent with the Government’s deregulatory agenda and will offer savings of around £2 million per year for LLPs.

I am aware that not all members of the accounting sector welcome the raising of the thresholds. Therefore, the Government will monitor the impacts of this change to ensure that the reduced burdens to business do not lead to any unintended consequences. We will respond if evidence indicates that action is required. There will be a full review of the provisions amended by the regulations by 2021. I should explain that not all LLPs will be able to take advantage of these deregulatory provisions. As is the case for companies, certain LLPs are excluded from the small and medium-sized LLP regimes and will continue to be required to provide full accounts. This includes LLPs that are involved in activities such as providing credit and insurance, where a higher standard of transparency is expected.

In conclusion, the regulations will not substantially change the way that LLP accounts are prepared and used but, importantly, they will achieve consistency and therefore simplicity across the UK’s financial reporting regimes for companies and LLPs. The regulations will provide real deregulatory opportunities for LLPs. There are approximately 58,000 LLPs in the United Kingdom. The vast majority of LLPs—some 98%—are small and will be able to benefit most from the changes if they wish. These savings will then be available to business to get on with running, growing and consolidating their businesses.

Effective financial management underpins the success of every business. Consequently, it will always be a priority to maintain the rigour and integrity of the UK’s accounting regime. Although the regulations will be largely deregulatory, LLPs will continue to be required to provide key information to inform decision-making, improve performance and promote confidence in a business’s future. The regulations will offer additional flexibility for LLPs and qualifying partnerships while ensuring that necessary protections are still afforded to the users of accounts, including the public. The alignment with the requirements for companies means that they will also meet the understandable desire of users and preparers of accounts for consistency in financial frameworks. I commend these regulations to the Committee.

[Lord Stevenson of Balmacara (Lab)]

I looked around in hope, but unfortunately not many people seem to want to respond to the interesting introduction we have had from the Minister. I do not intend to detain him long, but I want to raise one broadly philosophical point and a number of detailed questions to which I fully expect the best response will be a letter at some later stage. They are probably more detailed than is appropriate for this sitting today.

My philosophical point is really aimed at the statement with which the Minister ended, which, in a sense, was trying to assert that a benefit would flow to the business community by there being a more parallel arrangement for the ways in which the accounts are organised for LLPs and for the limited company sector, from where we are more used to seeing accounts. I want to probe a little at that, because it seems to me that we are coming from two different places. A limited company, in its broadest sense, is basically a mechanism under which those who carry out business are protected from, on the one hand, their owners—those who bring up the share capital—and, on the other hand, their creditors. In other words, they are detached from the actual process of the business by the fact of having limited liability.

That in a sense means that the full weight of the pressure that can apply in a commercial environment—whether they are trading well or badly, are seeking to expand, trying to borrow money, and everything else—is wholly dependent on that vehicle which is a limited company. It is therefore right that the standards set for that, where we have got to so far in company law, should have a very detailed focus on the way in which the accounts are generated and for the subsequent registration of those with Companies House and the availability of those through other means.

Partnerships are different. People work together in a partnership to provide a better or greater service; it is not set up as a business with the aim or purpose of shielding the individuals involved from the pressure of creditors or investors. Indeed, most partnerships with an LLP in its midst are not in any sense related to shareholders. There is no investment from outside and therefore no reporting requirement for those who have put money into the company, as it were. We can immediately begin to see where I am coming from here. There are different audiences for these different operations, so I am not quite sure why the Government are trying to bring them together. If they are trying to bring them together, what will the values be? I shall come back to that in a minute.

In my understanding, an LLP arrangement for partnerships—this is described in the papers we have received on the instrument—was largely brought about because of concerns about very large partnerships having to find individual partners and the possibility that other members of the partnership, presumably for whom the state has no interest because they are people who have willingly joined up to trade together for some purpose, which is very often but not necessarily always for business services, could expose themselves to a greater risk because of the size of the partnership. It could be so great that they cannot sensibly moderate the risk when other partners are taking decisions of which they have no knowledge. Clever people thought that to park the risk of that in an LLP, joined into the partnership, would be a way of expanding the ability of law, accountancy and similar firms to go forward in a way that would limit the responsibility to an internal pressure, not an external pressure. The difference is again there. We are talking about limited liability partnerships worrying about their own internal people—the people they are supposed to be working with— so that is not the same as a limited company, which might be concerned about an aggressive creditor or a problem with a shareholder who might wish to either acquire the ownership of the capital, liquidate the company or whatever. I just pose the question: I am not quite sure where we are here and why this is necessary.

The public accountabilities are obviously very different. A limited company is registered through the stock exchanges and there is responsibility for transparency and knowledge in that sense. We are also talking about the role of the state in terms of making sure the accounts are required, in what form and how they are to be publicly displayed. It is not that the two things should be different, but there may be reasons why they could be different because of the previous history that I mentioned. Also, as we discussed in Committee not so very long ago—and, indeed, in the House more generally on various Bills that have come forward in the last three or four years—the insolvency regimes are completely different. It is not at all clear why you would want to seek similarity across these two different species of commercial animal, but I wonder why, for a particular set of reasons that the noble Earl adequately explained, we may be moving into a situation that is not necessarily right for where we are.

That is my philosophical point. I do not expect a full and frank disclosure at this point; I am putting a marker down for what I think was started this time last year when we talked on another statutory instrument to do with insolvency, where we drew attention to various points. The noble Earl may have been part of that. This is stage two of that debate, and is not necessarily contributing to this measure.

The points I want to make are largely on the Explanatory Memorandum. As I have begun to do so in recent years—because they have improved—I congratulate the department on a good Explanatory Memorandum and I hope that the good wishes can be passed back to those who have been slaving away on it. They seem to have covered the ground very well. This is a very rare occasion where we have had some serious possible alternatives as to how the regulatory impulse could be put into practice—normally, we get a straw person and the answer that the Government always wanted, whereas this time we have some serious possibilities within which options are done. It may not be quite worth the candle—I am not saying that it will—because a lot of these are relatively small changes when it comes down to the costing that one has to do for this, but nevertheless it was good to see that the work had been done. It was a solid analysis on which we can pin our thinking.

Turning to my detailed questions, on the first page of the Explanatory Memorandum, at paragraph 3.2, I was completely thrown by the reference to the “free issue procedure”, which I took to various experts around your Lordships’ House and to the clerks, none of whom had the faintest idea what we were talking about. Again, I do not wish for an answer today, but as I understand it—if I am wrong, I hope that the Minister will correct me—charging £10 for something that will apply to only a very limited number of people seemed rather strange. The idea that you would further compound that calumny by not giving it free to those who had been affected adversely by the previous mistakes seemed a little harsh, but I will not press the point. A little more knowledge about the “free issue procedure” might have been given. It would have saved me a day of tramping around the corridors trying to work out what it was—it means “free”; in other words, the department did not publish the regulations free of charge to those who might want them. This might be helpful to read in Hansard later.

At paragraph 4.3, at the bottom of the second page and going on to the third, the assertion is made—and it may be right—that the bringing together of the two types of accounting arrangements will,

“avoid unnecessary complexity for those preparing and using accounts”,

which include,

“groups which include LLPs and companies within their structures”.

Given what I have just said about where these organisations come from, I was rather surprised to discover that there were a number of organisations that had both LLPs and ordinary companies in their structure. Could we have the figures on that at some point? We are talking about a relatively small number of companies anyway, so the number of groups that include both LLPs and companies must be very small indeed. It would be interesting to know what that figure is.

The Explanatory Memorandum is quite good on the broader picture, in telling us that there are approximately 58,000 LLPs in the UK, but it is not very good on the detail. Again, could we have a bit more clarity about that at some point? I got a bit confused reading paragraphs 7.4 to 7.7 about how many were being involved. Changes of organisations will happen as a result of the changes of the size groupings, but the Explanatory Memorandum does not explain what those boundaries are. Could that be explained? There are medium-sized and large LLPs, and there are groups that include both companies and LLPs. How many are there, roughly, in each group? It would be helpful to get a rough idea. I understand that the vast majority of them are small, but what does “small” mean in those circumstances?

Since the noble Earl mentioned it, can we also have a definition of “micro” in this sense? Micro seems a little odd for an organisational structure which was supposed to reflect the difficulties of large partnerships operating where individual partners would not necessarily be known by other partners. To have a micropartnership which is specially protected because of the new regulations does not seem right, because surely the whole point about a micropartnership is that partners know each other very well because they are micro. A little more detail on that would be helpful. We are talking about 5% or 6% of the total being involved in these changes. Since this is a deregulatory measure, I am in no sense trying to oppose it, but we should know what we are talking about. Although they are not major changes, they will make an impact on certain people.

My third point is about the consultation. I understand the difficulty, as this is a technical area and these are quite technical points. There may not have been a huge appetite, especially at £10 a pop, to get involved in this. However, it should be on the record that none of the 13 responses that were received to this consultation was from an LLP. The consultation responses were from accountancy representative bodies and other bodies related to them. Will the Minister reflect on that when he has time and let me know whether he feels that all that could be done was done to make sure? Were all 58,000 LLPs written to, although I suspect that would be otiose? A little bit more flesh about why the response was so bad would be helpful.

That leads on to a related point, which is that if that is the sort of response we are getting on this, I hope there were other ways in which information was passed through—including, perhaps, responses to the BIS Twitter account, which I notice gets its first mention in a public space. If the department is going to go back and consult on the way in which these changes are going to operate, it may have to do a bit more work to reach out and be convincing about whether this has eased the burden on business. In no sense am I saying that the accountancy representative bodies are not representative of accountancy bodies, but that seems a rather small group on which to pin rather a large change. I leave that point.

Finally, I turn to a familiar topic. Why is the change—admittedly, not a major one and not affecting many people—not being brought in on one of the common commencement dates? I am sure the Minister will be able to jump up and give an immediate response to this. These regulations are being brought in,

“on the seventh day after the day on which they are made”.

We are in April. If they had been brought back three or four weeks ago, they could have been brought in on 6 April like all the others that are supposed to be brought in, or they could wait until October. I know these regulations are important, but I do not think they are that important. I am sure the Minister will understand that I am not going to ask him under what conditions he sought regulatory approval from the appropriate committees for this change to be made, because that would be ridiculous, but I again point out that the whole purpose of common commencement dates, which the Minister’s colleagues in the department have often echoed as being important, is that they should be common dates that we all accept to bring in new regulations. We have failed again.

[The Earl of Courtown]

My Lords, I thank the noble Lord, Lord Stevenson, for his contribution. Having worked for the Minister on previous occasions in the Committee, I remember and understand his concern over common commencement dates. I understand that the professional bodies were exceedingly keen that the regulations came in as soon as possible. If there is anything more on common commencement dates that concerns the noble Lord, I have made a note of it, and if there is any more information, I will write, as on any other points he raised.

The noble Lord raised a number of issues, and I will respond as well as I can to most of them, but some I will write to the noble Lord about. The purpose of the accounts for LLPs and companies remains. Prior to the 2015 regulations amending company frameworks, the two systems were aligned. These regulations reinstate that position. The fundamental differences relevant to each business structure remain. The reports and accounts of both structures are reporting to the business owners.