Hidden control

One of the priorities agreed by world leaders at this year's G20 summit was the continuing need to combat tax avoidance at a multi-national level. The UK government has introduced a raft of measures in recent years in pursuance of this cause, with some targeted at individuals who use complex legal structures to hide their wealth and identities. The effectiveness of these measures depends on HMRC holding accurate information coupled with robust investigative powers to identify those behind such structures.

However, in a society where corporate vehicles are a common and legitimate form of business and personal wealth structuring, the government must strike a balance between the often conflicting principles of transparency, competitiveness and privacy.

This December sees the second reading of the Small Business, Enterprise and Employment Bill 2014-15 in the House of Lords. Among its provisions is the introduction of a UK central register of company beneficial ownership, which will be available to the public. The initiative follows commitments made at the G8 conference in June 2013.

The rationale for the register goes beyond confronting tax evasion and onto to the wider commercial benefit of revealing the individuals who really own, control and benefit from companies. In his own words, Prime Minister David Cameron said following the 2013 G8 conference: "We need to know who really owns and controls our companies. Not just who owns them legally, but who really benefits financially from their existence."

At present, UK companies are required to maintain a register of their owners which is disclosed at Companies House in its annual return. The Bill inserts provisions into the Companies Act 2006 that require companies to keep a register of people with 'significant control' over the company, and to make that register public. In the current draft, this obligation does not extend to LLPs. In broad terms, a person has 'significant control' if they hold (directly or indirectly, and either alone or as part of a number of joint holders) more than 25 per cent of the shares or voting rights in the company, or has the right to exercise significant influence or control over the company.

All UK companies will have a duty to investigate, obtain and update this information. It is proposed that limited exemptions from public disclosure will be permitted (such as where it is necessary to protect an individual's safety).

Unsurprisingly, the proposals for the register to be made public, or indeed to be required at all, have been met with opposition from legal advisors both in the UK and in offshore jurisdictions.

The new rules will not be capable of binding overseas companies, and so those who wish to maintain privacy are likely to restructure their companies' affairs or relocate their interests to other jurisdictions. If a UK company is beneficially owned by a foreign entity, the individuals behind the structure may be able to remain unknown through careful restructuring. This would dilute the benefit of the register and, indeed, it is speculated by some that it may actually encourage greater secrecy.

Even for supporters of the register, it is clear that the objectives behind it cannot be fully achieved if such disclosure (whether to the wider public or only to relevant tax authorities) becomes a global standard.

The prevalence of trusts in offshore structuring means the rules will also be of limited effect if similar requirements for disclosure are not extended to them. Trusts carry another layer of complexity as there is sometimes no 'real' beneficial owner as such (for example, the beneficial ownership may be shared between a class of potential beneficiaries).

For others who support the register, the proposal to make it public is a step too far. There may be commercial reasons for a person not wanting to disclose beneficial ownership. There may also be legitimate reasons why a person involved in a particular endeavour does not want to be publically identified (for example, it may be part of legitimate asset protection planning or there may be security reasons). A further argument is that it would place an additional administrative burden on companies. Overall, it would blunt the UK's competitive edge in business.

Whether the register strikes the appropriate balance between the benefit of greater transparency, a person's right to privacy and the need for the UK to maintain its position as a centre of international business, it will all be hotly debated as the Bill continues its journey through parliament.

Lucy Edwards is an associate in the private client team at Penningtons Manches