Sleeping and inactive limited partners to pay Class 2 and 4 NIC
In a published statement dated 4 April 2013, HMRC have announced a change of view on the NIC liability of sleeping and inactive ‘limited’ partners.
HMRC now regard such partners as always having been liable to pay Class 2 and 4 NIC as self-employed earners carrying on a business but have confirmed that they will not seek to collect payments for past periods prior to 6 April 2013. Conversely, they consider that where such partners have paid Class 2 and 4 NIC for past years, there is no entitlement to a refund of the contributions. They do expect all such partners to register to pay Class 2 and 4 NIC from 2013/14.
Rationale for the change in view
Inactive limited and sleeping partners take no active part in the running of the business and only inject capital to the business taking a share of the profits in return. Up to now, such profits have been treated as unearned self-employed income not liable to Class 2 and 4 NIC.
HMRC now take the view that sleeping and inactive Limited partners are liable to Class 2 and 4 NIC because they are “gainfully employed” as self- employed earners (s2(1)(b) SSCBA 1992). HMRC have outlined, as part of their reasons for their change in view, that for the purposes of NIC, being gainfully employed includes being in business. Furthermore, the legislation does not impose any requirement that partners, all of whom carry on a business with a view of profit, have to be active in the business.
Payment of Class 2 and 4 NIC
Application to pay weekly Class 2 NIC can be made by partners, not already paying Class 2 NIC, using form SA401. The normal exemptions apply in respect of those under 16 or over pension age, those qualifying for Small Earnings Exception or where valid claims for deferment are made.
Class 4 NIC will be assessed annually and sleeping and inactive Limited partners will have to account for Class 4, if any, for the 2013/14 tax year and any subsequent tax years. Losses from earlier years available to set against profits chargeable to Class 4 NIC can be brought forward and set against the profits from the same trade, now giving rise to a Class 4 NIC liability in 2013/14.
The importance for practitioners
This is unwelcome news and is particularly disappointing for those investors in partnerships who are looking for a share of the profits. They may need to consider whether they remain partners personally or whether they change the structure through which they operate as investors.
Those practitioners acting for sleeping or inactive Limited partners will need to review the partners NIC position as a matter of urgency and take what steps are required to register the partners for payment or consider any necessary claims for exemption or deferment.