From 6 April 2013, sleeping and inactive limited partners will be required to pay class 2 and class 4 national insurance contributions (NICs).

Following a change in its interpretation of the law, HMRC now consider that sleeping and inactive limited partners are liable to pay class 2 NICs as they are "gainfully employed" as self employed earners and class 4 NICs because 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".

All sleeping and inactive limited partners will therefore now be required to:

Advise HMRC of their self-employed status using form SA401 and, if not already doing so, arrange to pay class 2 NICs from 6 April 2013 or seek exception/deferment.

Class 2 NICs is a weekly liability (£2.70) which will be due from 6 April 2013, unless the individual is either:

  • under the age of 16;
  • over pension age;
  • granted the small earnings exception where profits are less than £5,725 per year;
  • a married woman or widow with reduced liability; or
  • claims deferment on account of other employments.

However, even if an individual falls within one of the exceptions above, they may wish to carry on paying Class 2 NICs voluntarily to keep up their entitlement to the state pension and other benefits.

Whilst many individuals will qualify under one of these exceptions, HMRC must still be notified of their self-employment status.

Account for any class 4 NIC liability from the 2013/14 tax year.

Class 4 NICs are assessed annually depending upon the level of taxable profits. However, they are only payable on the profits of a trade, profession or vocation which are chargeable to income tax. Consequently class 4 NICs are not payable on interest, dividends, income from property or chargeable gains, which will be particularly relevant in the case of members of investment partnerships.

We are currently seeking clarification of HMRC's change of view on the gainful employment status of sleeping and inactive limited partners despite no recent legislative changes nor any known decisions in conflict with historic case law.

However, as it is likely to take some time to get clarification from HMRC regarding its change of view, we recommend that all sleeping and inactive limited partners should assume that the new interpretation does apply to them and proceed to register their self-employment status with HMRC.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.