Both UK limited partnerships (LPs) and UK limited liability partnerships (LLPs) have, for some years, been widely utilised as part of international investment and management structures of both US sponsors and US managers. Whilst UK LPs have been widely used as investment vehicles within the private equity industry and, to a lesser extent, in connection with other illiquid investment strategies, the UK LLP has become the vehicle of choice for US managers who have established a presence in the United Kingdom. The attractions of the UK LLP have been clear, combining the advantage of being taxed as a partnership, whilst still offering limited liability, corporate personality and – importantly – organisational and structural flexibility. However, as the popularity of the UK LP and, in particular, the UK LLP has increased, so has the level of scrutiny applied by the UK tax authority (HMRC). Following the conclusion of a 2013 public consultation on measures designed to reform certain aspects of the UK tax regime relating to LPs and LLPs, HMRC have now published draft legislation for inclusion in the UK Finance Bill 2014. The areas which are subject to the new UK tax legislation can be broadly placed into three categories: (1) countering the use of UK LLPs to disguise what HMRC consider should be employment relationships (and, thereby, avoid certain employment and payroll taxes); (2) countering arrangements whereby economic interests and other entitlements are allocated to or transferred between members of LPs and LLPs; and (3) amending certain aspects of the UK tax regime relating to LPs and LLPs to take account of the remuneration deferral requirements under the EU Alternative Investment Fund Managers Directive. In a guest article, Will Smith, a partner in the London office of Sidley Austin LLP
, discusses the anticipated impact on US hedge fund managers of the draft legislation.