Council setting up 'sham' LLP as trading arm?

Council setting up 'sham' LLP as trading arm?

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My local authority is wanting to set up an arms-length external organisation (ALEO) to provide social care services, rather than do this in house. They could have gone with a limited company, but want to receive profits from the company without paying corporation tax. So they are going with an LLP (as they are tax transparent so taxed like their members, and local authorities don't pay corporation tax).

However (naturally) LLPs are limited liability partnerships and must therefore have two or more members. So I was stumped as to how they would achieve this. The council's reports mentioned it has been done successfully before by another local authority (I won't say which one) so I looked into their set up and it's as follows:

Local authority (COUNCIL) sets up a limited company subsidiary (LTDCO). LLP is set up with the partners being COUNCIL and LTDCO. LLP agreement is in place providing that:

  • COUNCIL is entitled to 99.999% of the profits and LTDCO to 0.001% of the profits
  • COUNCIL exercises agreed business controls so that LLP requires its approval for a number of matters including changing the nature of the business, prices, senior salaries, etc.
  • LLP board consists of 4 COUNCIL elected members, 3 COUNCIL officers and LLP’s Chief Executive. Chairperson is appointed by COUNCIL not LLP.
  • COUNCIL is entitled to issue directions to LLP from time to time and the board shall be bound to comply promptly with any such direction

So it looks like a loophole - the LLP isn't a genuine partnership between COUNCIL and LTDCO, but a de facto wholly controlled subsidiary of COUNCIL.

Do you think this is a legitimate setup, and is is ethical? We are thinking of challenging our local authority if they try to use this structure in our area.

Replies (6)

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By WhichTyler
02nd Aug 2014 09:58

How is this supposed to make a difference?
Yes it's clearly a subsidiary in accounts, but what benefit is the council hoping to achieve? Or what harm is it doing to the rest of the world?

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By johngroganjga
02nd Aug 2014 10:19

I agree it's an artificial structure - in particular the company serves no purpose other than a technical one (as a placeholder). But it's all transparent and there for all the world to see. And above all what harm does it do?

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By zebaa
02nd Aug 2014 12:57

@john

It is a potential problem because the LLP operation is not transparent. All sorts of poor performance can be swept under the carpet. May be legal - I admit I do not know - and to dispute that is going to cost money, which is likely to be in short supply. It might be worth trying companies house first to see what their take on this is.

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By WhichTyler
02nd Aug 2014 13:31

But...

Its accounts will be published, and I think it will still be subject to FoIA and OJEU regs. Still not clear what the purpose is? Its clearly accountable to the Council, but might be a way of ringfencing risk so that it can undertake commercial contracts for other organisations without exposing the Council? Seem's like a very short 'arm'...

 

Edit: This might be of interest http://www.apse.org.uk/apse/index.cfm/members-area/briefings/2011/11-32-...

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David Winch
By David Winch
02nd Aug 2014 14:32

As I understand it . . .

As I understand it (and I am no expert in this area) a local authority (a council) is a body created by statute which can perform / undertake the functions prescribed by statute (only).

So the council cannot operate a commercial business & cannot provide goods or services for payment outside its statutory remit.  So, as I understand it, council A cannot sell its expertise to manage services for council B, for example.

However I believe those restrictions do not apply to an arms-length external organisation.  So one reason for forming an ALEO is to enable commercial profit making activities with the profits being reaped by the council.

I think a similar situation arises for charities (which are not permitted to trade but form trading companies which covenant their profits to the charity).

Of course a body which can make a profit can also make a loss . . . 

I am not clear whether the OP is concerned about his local authority setting up an ALEO or is concerned that the ALEO being set up is to be an LLP.  Perhaps he wants his local authority to suffer corporation tax on the profits of the ALEO (for some reason)?

David

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By james3
02nd Aug 2014 20:26

Thanks for your replies.

My concerns are mainly with accountability (whilst the council as a whole may be the in control, individual opposition councillors may not have the same access to scrutinise the LLP as they would a department of the council), the dubious artificial structure, the fact that the council (as a branch of government) is going to be providing services in competition with private businesses, the fact that they will not have to pay any tax on those profits (councils don't pay corporation tax because they are not expected to be making profit) whilst private businesses have to pay their fair share (although I admit profits are going back into to public purse).

Also, as David points out, local authorities don't have the powers to operate commercial businesses (as Parliament has decided), so they are exploiting a loophole by setting up a shell company and entering into a LLP with it.

It's not that I want them to "suffer" taxes, but if they are going to run a commercial business why should they not have to pay them? I know the profits would be used by the council on public services and not luxury living for elected members and council officers, but if they were to pay tax, it would go to the government and pay for public services as decided by our elected representatives. A proportion would come back to the local authority as part of their annual budget.

To give an abstract example, what if a local authority had set up Facebook (just an example, swap for the name of any profitable business) back in 2004 and now, ten years later, it was receiving billions of pounds a year in extra revenue. The people living in that local authority area would have fabulous public services, but people in the rest of the country would see no benefit.

I hope people understand where I'm coming from. At the end of the day, they will probably run it responsibly, but I'm always wary as to how things can turn out.

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