LLPs are required to maintain new statutory register from April 2016.
As part of the government’s objective to tackle money laundering and encourage corporate transparency, English LLPs (as well as limited companies) will soon need to comply with the Register of People with Significant Control (“PSC”) Regulations 2015, which will require a register to be maintained of all of those persons (including non-members) who have an interest in an LLP of a kind which the Regulations require to be recorded.
The timetable for implementation is very tight. It is anticipated that the Regulations will apply to LLPs from April 2016, with Companies House filings needing to be made from June 2016.
The assessment of who is a PSC and the extent of their interest will be an ongoing administrative burden.
What will the PSC register show?
The PSC register will show not just which individuals within the LLP are classified under the Regulations as having ‘significant influence or control’ over the LLP, but also grade that person’s interest with a percentage range within one of three bands:
- more than 25% to 50%;
- more than 50% but less than 75%; and
- 75% or more
This banding system adds significant complexity to the system, particularly for LLPs, which will have to rely more heavily than limited companies on statutory guidance as to what the percentages relate.
What does significant influence or control mean?
Under the current proposal, any individual who directly or indirectly owns or controls more than 25% of the LLP will be caught by the Regulations. The percentage is expected to be assessed by reference to the following criteria:
- voting rights (i.e. rights conferred on members in relation to matters to be decided by a vote of the members);
- rights to appoint or remove the majority of those involved in the management of the LLP; and/or
- rights over surplus assets on a winding up.
In addition, there is a “sweeper” provision to capture people who exercise significant influence or control over the LLP (or who have the right to do so), even if they do not have the above rights. Draft statutory guidance released on 27 January 2016 provides examples of what is likely to amount to significant influence or control, which includes:
- being more likely than not to receive more than 25% of the profits of the LLP;
- having absolute decision-making power over business decisions of the LLP; or
- holding absolute veto rights over business decisions of the LLP (unless the veto rights are held solely for the purposes of protecting a person’s own or a minority interest).
Somewhat confusingly, the various criteria under which a person may be deemed a PSC means the percentages in the PSC register could add up to more than 100% (e.g. three or more members in the ‘75% or more’ band).
The guidance also provides a non-exhaustive, indicative list of the types of roles and relationships which are unlikely to point to a person having significant influence or control (such as the lawyers, accountants and tax advisers of an LLP, or the LLP’s employees).
Challenges for LLPs
Applying the above conditions to LLPs will be far from straightforward. Many LLPs will face a greater challenge than companies in determining with confidence which individuals have significant influence or control and the appropriate band in which they should be placed.
Unlike a board of directors, members may or may not have any management powers. Nor are there likely to be clearly defined ‘shares’ in an LLP which determine ownership, votes or rights on a winding up. Ownership of an LLP can be fluid, a matter of contract and not easily measured or adjusted. A careful judgment will be required in many cases.
Typical occasions when the PSC register will need to be checked and updated will be when members join or leave an LLP and when profits are allocated at the end of a financial year.
- Grading a PSC’s interest
Grading PSCs within the three bands will be burdensome even for LLPs which have a simple points-based system for determining voting rights and rights to profits. For the many LLPs which only allocate points to limited classes of member or which have no formalised systems at all, it will be harder still.
For example, different categories of LLP member are often entitled to vote on different matters, which complicates the assessment of voting power. Also, many LLPs delegate all or some decision-making powers to a management committee. The flexibility inherent in LLP decision-making systems means that every LLP will need to judge how to treat its management structures for the purposes of the PSC register. Professional advice may be helpful to reach a view.
- Companies House Filings
As well as maintaining their own PSC register in real-time, LLPs will be required to update a register at Companies House, on at least an annual basis. The information filed at Companies House will be made available to the public, which may mean that previously confidential ownership and control arrangements between members will be exposed.
What can be done now?
Before the Regulations are implemented, LLPs should consider the following:
- Who will be responsible for complying with the Regulations, and how?
- Who is likely to fall within each band?
- Is it possible to avoid certain members inadvertently falling within or moving between bands, which is likely to trigger the requirement for an update?
Any decisions will need to be reviewed once the final regulations and statutory guidance are published.