Following a change of view, since 2013 HMRC have considered that Sleeping or inactive Limited Partners are liable to pay Class 2 National Insurance contributions (NICs) as self employed earners and Class 4 NICs in respect of their taxable profits.

  • "Inactive Limited Partners” are Limited Partners who take no active part in running the business.
  • Partners who have not paid Class 2 or Class 4 NICs for past periods will not be required by HMRC to pay those contributions.
  • This measure only applies to partners who are individuals.

HMRC regard all partners as “gainfully employed” as self employed earners for the purposes of section 2(1)(b) of the Social Security Contributions and Benefits Act 1992 because: -

  • “Employment” as defined in section 122 of the Social Security Contributions and Benefits Act 1992 includes business and section 1(1) of the Partnership Act 1890 provides that “Partnership is the relation which subsists between persons carrying on a business in common with a view of profit”; and
  • Section 2(1)(b) of the Social Security Contributions and Benefits Act 1992 imposes no requirement that partners have to be active in the business.

Exemptions from Class 2 NICs apply if an inactive partner is either:

  • under 16
  • over pension age
  • granted the Small Earnings Exception
  • a married woman or widow with reduced liability, or
  • claiming deferment on account of other employments.

What to do

  • Partners need to check their Class 2 NICs position and if necessary advise HMRC of their self-employed status and arrange to pay NICs, or
  • seek exception/deferment.

Payment of Class 4 NICs from 6 April 2013

HMRC now take the view that Sleeping and inactive Limited Partners are liable to pay Class 4 NICs because:

  • In order for there to be a partnership for the purposes of the Partnership Act 1890 the persons making up the partnership (whether General, Sleeping or Limited Partners) will all be “carrying on a business in common with a view of profit”; and
  • Section 15 of the Social Security Contributions and Benefits Act 1992 imposes no requirement that partners have to be active in the business.

Voluntary payments of Class 2 and 4 NICs for years prior to the 2013-14 tax year

There may be instances where some Sleeping and inactive Limited Partners may wish to pay Class 2 and 4 NICs for years prior to the 2013/14 tax year in order to qualify for, or improve, contributory benefits, for example the basic State Pension and they may do so.

Comment

The change of view may assist HMRC in combat some tax avoidance schemes, however it looks as if it will catch out some quite innocent situations  involving limited partnerships; structures which are favoured by private equity, as well as many family partnerships.

The Institute of Chartered Accountants in England and Wales (ICAEW) Tax Faculty says that it:

"...was surprised by this announcement. We are not aware of any previous discussion on the matter. We have raised a number of questions with HMRC about the basis for this new interpretation, and will publish further information for members when we can."