THE problem of Scotland’s zero-tax companies, and their use by foreign businesses and individuals to avoid tax, came as something of a shock when it was first revealed by The Herald. We like to think of Scotland as a country that enforces the principle of fair taxation, but the sheer scale of the use of Scottish limited partnerships or SLPs exposed the truth. Scotland may not look or feel like the tax havens of South America or the Caribbean, but in some parts of the world, that is increasingly how Scotland is coming to be seen: a tax haven.

The reason foreign businesses can use Scotland to avoid tax is because of the particular way that SLPs are set up and run. The partnerships are easy to acquire: they are usually sold off the shelf and are registered in private homes or small offices across the country. But what makes them particularly attractive for some foreign firms is that, although they do not conduct any actual business in the UK, for tax purposes they are British companies and that means they can avoid tax in their home nation.

The technicalities of Scots Law also make the limited partnerships attractive to criminals. Unlike similar firms in England and Wales, Scottish limited partnerships have their own legal personality which means they can enter into contracts, own assets and open bank accounts. All of this makes it easy for the SLPs to be used for money laundering or embezzlement.

As the scale of the problem has emerged – thousands of limited partnerships have been created in recent years – the risk of damage to Scotland’s reputation abroad has become clear, and it would seem that the damage is already being done. After a series of high-profile money laundering scandals, Ukraine is considering new rules that would make it much harder for businesses and individuals to use Scottish limited partnerships to avoid tax. Effectively, SLPs would come under the same enforcement regime as more traditional tax havens in the Caribbean.

The tax authorities in Ukraine say such a change is legally and economically justified, but, should it go ahead, it would represent a significant change in how the UK and Scotland is perceived abroad; it also underlines the importance of the UK Government’s review of SLPs finding a way to better manage them. Not all limited partnerships are corrupt, but what is particularly reprehensible about the use of SLPs to avoid tax abroad is that resources which could be used to pay for public services in poor countries are being funnelled abroad using tax haven firms in one of the richest.

The UK Government’s review of SLPs is a welcome move in the right direction, but if it is to prove effective, it will have to look at the procedures for the policing of companies, which are not as strong as they should be – some companies can go for years without publishing accounts and checks on the accuracy of company documents are not as frequent as they should be. The reality is that limited partnerships are at the centre of what is effectively a white-collar industry in Scotland facilitating money laundering and tax evasion on a grand scale and only a dramatic tightening of the rules on limited partnerships can put a stop to it.