Q: I am a ‘sleeping partner’ in a limited partnership and have historically not paid class 2 and 4 national insurance contributions. I understand that HMRC has made a change in this respect. What has changed?
A: HMRC has announced a change for the requirement to pay class 2 and 4 national insurance contributions for sleeping and inactive limited partners following a review of its interpretation of the law.
Historically, inactive limited and sleeping partners who took no active part in the running of the business and simply acted as investors who sought to make a return on their investments were not liable to class 2 and 4 NICs as their income was treated as unearned income.
HMRC has now taken the view that sleeping and inactive limited partners are liable to class 2 and 4 NIC as they are deemed to be “gainfully employed” as self-employed earners, as legislation does not require that partners involved in a business with a view to a profit have to be active in that business.
From 6 April 2013 all sleeping and inactive limited partners not already paying class 2 and 4 NICs as a result of being self-employed must advise HMRC of their self-employment status using form SA401 and arrange to pay class 2 NICs or, alternatively, seek an exemption or deferment.
The exemptions for class 2 NICs may apply if the individual is under the age of 16, has reached state pension age, qualifies for small earnings exception where profits are less than £5,725 a year or is claims deferment on account of other employment.
Class 4 NICs, which are dependent on the level of taxable profits, are assessed annually and will be assessable from 2013/14 onwards under this new arrangement. Losses from earlier years that have not yet been set against profits chargeable to class 4 NICs, can be brought forward and set against the profits from the same trade that gives rise to a Class 4 NIC liability in 2013/14.
Although HMRC now regards such partners as always having been liable to pay class 2 and 4 NIC as self-employed earners carrying on a business, they have confirmed that they will not seek to collect payments for periods prior to 6 April 2013. However, they also consider that where partners have already paid class 2 and 4 NICs for years previous to 6 April 2013, they will not be entitled to a refund of contributions.
Practitioners who have investors in partnerships may need to consider whether to continue as partners in this manner or perhaps look to change the structure through which they operate.
The recommendation, therefore, is for practitioners to review the NIC positions of all sleeping or inactive limited partners for whom they act and proceed to register their self-employment status with HMRC and/or consider any necessary claims for exemption or deferment.
Ben Chaplin is managing director of TaxWise