A legal loophole that threatens to turn Scotland into an unlikely tax haven is to be closed as concern grows that it is being exploited by international criminals and tax cheats.
Ministers have announced an urgent review of the 100-year-old law on limited partnerships amid evidence that hundreds of those registered in Scotland have links to fraud inquiries in eastern Europe, allegations of money laundering and apparent tax evasion.
The number of limited partnerships established in Scotland, where they benefit from greater secrecy and incur fewer tax liabilities than in the rest of Britain, has grown rapidly.
There are more than 24,000 in Scotland — 70 per cent of them set up in the past five years — compared with a total of 14,500 in England, Wales and Northern Ireland.
The Department for Business, Energy and Industrial Strategy said that while limited partnerships had a wide range of legitimate uses there was “valid concern that aspects of their legal characteristics may also act as enablers for criminal activity”.
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The situation in Scotland is causing alarm because partnerships there have a separate “legal personality” from their owners, which can be individuals or other businesses. Anti-corruption campaigners say this means that partnerships can hold assets, borrow money from banks and enter into contracts while their true ownership remains secret. If the owners are based overseas they do not pay tax and do not have to file accounts in Britain.
Between December 2015 and June 2016 there were 2,878 new limited partnerships registered in Scotland — more than 80 per cent set up with the help of company formation agents.
Officials said there was “evidence that suggests some formation agents may be registering limited partnerships in Scotland which are then undertaking criminal activities”.
An alleged $1 billion bank fraud in Moldova is said to involve a number of shell companies there which have links to Scottish partnerships. There are also alleged links to corrupt arms deals in Ukraine.
One business formerly registered at a residential address in Rosyth, Fife, is involved in a dispute between a nephew of the late Uzbek president Islam Karimov and a business rival over the ownership of hotels in Latvia.
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Across eastern Europe, in particular, the model of the Scottish limited partnership is being marketed as a “zero-tax company”. One Latvian company formation agent promotes Scottish limited partnerships as an opportunity to create a zero-tax business in a country which does not carry the stigma of being regarded as a tax haven.
Announcing a call for evidence before a reform package, Margot James, a business minister, said: “I am concerned about recent reports relating to the use of limited partnerships, suggesting that some are being used for criminal activity.”
Control over partnership law lies with Westminster rather than the Scottish government.