Explanatory Memorandum to the Limited
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EXPLANATORY MEMORANDUM TO THE LIMITED LIABILITY PARTNERSHIPS (ACCOUNTS AND AUDIT) (APPLICATION OF COMPANIES ACT 2006) REGULATIONS 2008 2008 No. 1911 1. This explanatory memorandum has been prepared by the Department for Business, Enterprise & Regulatory Reform and is laid before Parliament by Command of Her Majesty. 2. Description 2.1 The Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008 are to be made under the Limited Liability Partnerships Act 2000 (“the LLP Act”) and sections 1210(1)(h) and 1292(2) of the Companies Act 2006 (“the 2006 Act”). They apply to limited liability partnerships (LLPs) provisions on the accounts and audit of companies contained in the 2006 Act. They apply to accounts for financial years beginning on or after 1st October 2008. 2.2 The Regulations will replace provisions of the Limited Liability Partnerships Regulations 2001 (“the 2001 Regulations”)1 and of the Limited Liability Partnerships Regulations (Northern Ireland) 2004 (“the 2004 Regulations”)2 which applied to LLPs provisions of the Companies Act 1985 (“the 1985 Act) and the Companies (Northern Ireland) Order 1986 (“the 1986 Order) relating to accounts and audit. The Regulations make a small number of substantive changes to the accounting and auditing requirements for LLPs. 3. Matters of special interest to the Joint Committee on Statutory Instruments 3.1 The Regulations extend to the United Kingdom (reflecting the extent of the 2006 Act). The LLP Act will be extended to Northern Ireland by section 1286(1)(a) of the 2006 Act, and that section will be commenced to the extent necessary by separate Commencement Order which it is proposed will be made before these Regulations are made, also coming into force on 1st October 2008. That Order will also (to the extent necessary) commence section 1286(2)(a) of the 2006 Act, repealing the corresponding Northern Ireland Act. Regulation 58 of the Regulations contains consequential repeals of provisions in the 2001 Regulations and the 2004 Regulations which apply accounts and audit provisions in the 1985 Act and the 1986 Order respectively to LLPs. 1 S.I. 2001/1090. 2 SR (NI) 2004/307. 3.2 Regulation 27 applies to LLPs, with modifications, section 468 of the 2006 Act, which confers power on the Secretary of State to make further provision about accounts by regulations and which is subject to the Parliamentary procedure set out in section 473 (applied by regulation 31). This will ensure that if in the future relevant changes are made to the accounting provisions for companies using powers in the 2006 Act subject to negative Parliamentary procedure (eg increases in the thresholds for small and medium- sized companies), the law on the accounts of LLPs can be kept in line with that of companies, using the same Parliamentary procedure. 4. Legislative Background 4.1 The LLP Act and its Northern Ireland equivalent 3 provided for the creation of a new corporate vehicle, the LLP. An LLP gives the benefits of limited liability, as for a company, but allows its members the flexibility of organising their internal structure as a traditional partnership. The LLP is a legal entity separate from its members, but unlike a company does not have shares or shareholders and is not therefore subject to the same provisions concerning the relationship between a company, its shareholders and its directors. It is however subject to similar accounting and auditing provisions to those for companies. 4.2 The LLP Act and its Northern Ireland equivalent, both setsout the basic structure and formation provisions for LLPs. The 2001 Regulations made under the LLP Act ( which came into force at the same time as the LLP Act), and the 2004 Regulations, set out most of the detailed provisions for LLPs by applying large parts of the 1985 Act, the Insolvency Act 1986 and other enactments, and their Northern Ireland equivalents, to LLPs. Many of the provisions applied are modified to reflect the particular characteristics of an LLP. The same approach is taken in Northern Ireland. 4.3 In light of the changes made to company law by the 2006 Act, these Regulations apply the accounts and audit provisions of the 2006 Act with modifications to LLPs. They apply to accounts for financial years beginning on or after 1st October 2008. 4.4 The 2001 and 2004 Regulations apply large parts of the 1985 Act and 1986 Order with modifications of varying degrees made by textual amendment in the Schedules to those regulations. This creates a complex set of regulations that have to be read in conjunction with the 1985 Act or the 1986 Order. One of the key objectives of the 2006 Act was to ensure better regulation and to ‘think small first’. In line with this, the approach to drafting the LLP regulations was reviewed and consulted on. As a result, these Regulations set out the 2006 Act provisions applied to LLPs in full, as modified to take account of the particular characteristics of LLPs. 4.5 As is the case for companies, separate regulations (the Small Limited Liability Partnerships (Accounts) Regulations 2008 and the Large and Medium-sized Limited Liability Partnerships (Accounts) Regulations 2008) will apply to LLPs provisions on the form and content of accounts previously 3 The Limited Liability Partnerships Act (Northern Ireland) 2002 [2002c.12] contained in the Schedules to Part 7 of the 1985 Act and Part 8 of the 1986 Order and now prescribed in regulations made under Part 15 of the 2006 Act. 4.6 Parts 2 to 9 of the Regulations apply with modification the relevant provisions of Part 15 of the 2006 Act. This includes provisions on the preparation of accounts. There are a few substantive changes to the accounts provisions for LLPs. New section 410A of the 2006 Act4, which requires disclosure in the notes to accounts of off-balance sheet arrangements, has been applied to large and medium sized LLPs. Section 423 of the 2006 Act as applied to LLPs does not re-enact the current requirements for LLPs to send copies of their annual accounts and auditor’s report to members and others within one month of the accounts being signed, and provides instead for the accounts to be sent no later than the end of the period for filing them with the registrar of companies, if earlier, the date on which they are actually delivered to the registrar. 4.7 Section 453 of the 2006 Act and regulations made under it (the Companies (Late Filing Penalties) and Limited Liability Partnerships (Filing Periods and Late Filing Penalties) Regulations 2008 (S.I. 2008/497) are applied to LLPs with modifications. The penalties which LLPs must pay to the registrar of companies are those specified for private companies in regulation 4 of S.I. 2008/497, the penalty being doubled for late filing in two successive years beginning on or after 1st October 2008. 4.8 Parts 10 to 14 of the Regulations apply the relevant provisions of Part 16 of the 2006 Act on audit to LLPs. In particular, the new provision in Part 16 on signature of audit reports by the senior statutory auditor (sections 503 to 506), the new offence in connection with the audit report (sections 507 to 509) and strengthened rules on statements by those ceasing to be auditor (sections 519 to 525 as they apply to unquoted companies) are applied to LLPs with modifications. Parts 1 and 2 of the Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) Regulations 2008 (S.I. 2008/489) are also applied to LLPs. 4.9 The Regulations also apply Part 42 of the 2006 Act on statutory auditors to those acting as auditors of LLPs. 5. Territorial Extent and Application 5.1 This instrument applies to all of the United Kingdom. 6. European Convention on Human Rights 6.1 The Parliamentary Under Secretary of State for Trade and Consumer Affairs, Gareth Thomas, has made the following statement regarding Human Rights: 4 Section 410A was inserted into the 2006 Act by regulation 8 of the Companies Act 2006 (Amendment) (Accounts and Reports) Regulations 2008 (S.I. 2008/393). In my view the provisions of the Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008 are compatible with the Convention rights. 7. Policy background Policy 7.1 The 2006 Act seeks to ensure that British business operates within a legal and regulatory framework that promotes enterprise, growth, investment and employment. The Act has four key objectives: • enhancing stakeholder engagement and a long term investment culture; • ensuring better regulation and a “think small first” approach; • making it easier to set up and run a company; and • providing flexibility for the future. 7.2 By applying the 2006 Act to LLPs in the manner outlined above, the aim is for LLPs to be able to take advantage of the major benefits to business of modernising and simplifying company law, thereby ensuring that LLPs remain an attractive corporate vehicle for businesses, whilst retaining their distinctive characteristics. As with the 2006 Act, key to this approach is to ensure that the regulations for LLPs remain up to date and fit for purpose and ‘to think small first’. The new approach to legislating for LLPs results in a stand alone set of regulations that can be read without reference to the 2006 Act. 7.3 In order to assess the potential impact of changes made by the 2006 Act, detailed policy and legal analysis was undertaken to compare the provisions in the 1985 Act applied to LLPs to those in the 2006 Act. This identified: • Amendments to the LLP Act consequential upon the 2006 Act; • Provisions of the 2006 Act where there is a corresponding provision of the 1985 Act (or 1986 Order) which is currently applied to LLPs, or where a provision could be applied with no significant change to the current regime; • Provisions of the 2006 Act that in principle could be applied, but where doing so would change the current policy or introduce a new area of law; • Provisions of the 2006 Act that cannot be applied to LLPs, because of the fundamental difference between LLPs and companies, and/or to do so would be outside the powers available to make secondary legislation.