For decades the UK limited partnership – in both its English and Scottish forms – has been the market-leading structure for European private equity and venture capital funds, despite competition from other onshore and offshore alternatives. Combining tax transparency, limited liability for passive investors and relative contractual freedom, the UK partnership structure has been pretty resilient over several decades. But its crown looks increasingly shaky.

Most recently, Brexit-related restructurings have required some fund managers to look elsewhere in the European Union for their fund domicile. Many have alighted on Luxembourg, in part because of a need to increase substance there for tax reasons, but also because their recently reformed partnership structure has some advantages over many of its competitors. The UK has tried to fight back, most notably with some changes to UK law last year that created a new form of limited partnership, the Private Fund Limited Partnership. The new structure was an improvement, and followed long-standing industry calls for reform. But the next round of proposed changes – laid out in a consultation document published this week – looks less positive.

To be fair, the UK government does have to tread a fine line. On the one hand, it seems clear that Scottish limited partnerships (which, unlike English partnerships, have separate legal personality) have sometimes been used by criminals, in particular for money laundering. And while the extension of anti-money laundering rules to Scottish limited partnerships last year significantly reduced the scope for abuse, political pressure to take further action has been building for some time. But, on the other hand, there is a very important and perfectly legitimate use for Scottish (and English) limited partnerships, as the private equity and venture capital industry knows very well, and changes should seek to preserve the features that make them a natural choice for European fund managers. Any other outcome would surely damage competitiveness at a time when the UK ought to be doing everything in its power to anchor financial services businesses to Britain.

The government has clearly recognised that dichotomy in formulating its proposals, and has listened to the private equity industry’s arguments that dramatic changes – some have even called for Scottish limited partnerships to be banned completely – would cause huge and unnecessary damage. As a result, a number of this week’s proposals (which will apply to all UK limited partnerships, not just those established in Scotland) would strike an appropriate balance. For example, the mooted requirement for new limited partnerships to be established by an intermediary who is supervised by an appropriate regulatory body, and who will therefore provide assurance that money laundering checks have been carried out, should not be a major problem for private equity firms. Equally, the requirement to file an annual confirmation statement is not objectionable in itself, although its precise content may require some further thought.

But some of the other proposals could impact the competitiveness of the UK structure and the industry needs to continue to put its case. For example, one can understand why there is a desire to ensure that documents can be validly served on a partnership at an address in the UK, but one of the two options proposed by the government – that the principal place of business must remain in the UK – would dramatically reduce flexibility. The alternative suggestion of a service address in the UK would be preferable, as the consultation paper explains, but it is disappointing that the government has not simply opted for that. And similarly, the government’s request for views on whether UK limited partnerships should be required to prepare accounts in line with the requirements for private companies creates some uncertainty and (if adopted) would leave the UK out of step with other jurisdictions.

The proposals to introduce a “strike off” procedure for limited partnerships that are no longer trading also acknowledge the potential problem: that limited partners would be concerned that a limited partnership could be removed from the register without their knowledge or consent. The government therefore promises safeguards to ensure that their position is protected. It remains to be seen whether these safeguards will allay concerns, but in principle that would seem to be achievable.

All in all, it is clear that the government does not want to damage the competitiveness of the limited partnership structure and has engaged constructively with the private equity industry to ensure that legitimate businesses are not unduly prejudiced by changes that target criminal activity. But any change is unsettling, and is the last thing that the UK needs as it charts the rocky waters of Brexit. So the government should conclude its deliberations as quickly as it can once the consultation ends in July, and continue to work with the private equity industry to minimise the damage these changes will cause.