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News - 7 May 2013

Changes to class 2 and class 4 NICs

HMRC now considers that sleeping and inactive limited partners are – and have been in the past - liable to pay Class 2 National Insurance contributions (NICs) as self-employed earners and Class 4 NICs in respect of their taxable profits.

Tonmoy Kumar, Manager of the Accounts Department of ABDS comments:
“A ‘Sleeping partner’ is usually a partner who plays no active part in the business, sometimes a partner who is not disclosed as such to the outside world. ‘Inactive limited partners’ are limited partners who take no active part in running the business. This view represents a change from that previously held by HMRC and the Department for Work and Pensions.”

Stuart Coleman, Manager of the Tax Department of ABDS comments:
“Sleeping or inactive limited partners who have not paid Class 2 or Class 4 NICs for periods before 6 April 2013 will not be required by HMRC to pay those contributions.”

HMRC now takes the view that sleeping and inactive limited partners are liable to pay Class 2 NICs because they are ‘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’ 
  •  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.

Class 2 NICs is a weekly liability (normally flat rate £2.70 per week from 6 April 2013) which will be due from 6 April 2013 unless a sleeping or inactive limited partner is either under 16, is over pension age, is granted the small earnings exception, is a married woman or widow with reduced liability, or claims deferment on account of other employments.

It will therefore be necessary for sleeping and inactive limited partners to check their Class 2 NICs position. Many sleeping and inactive limited partners will qualify under one of these exceptions but there is a need to ensure that the appropriate action has been taken.

HMRC now takes the view that from 6 April 2013 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’
  • Section 15 of the Social Security Contributions and Benefits Act 1992 imposes no requirement that partners have to be active in the business.

Class 4 NICs is assessed annually but, because HMRC has announced its revised view towards the end of 2012-13 tax year, sleeping and inactive limited partners should account for Class 4 NICs liability, if any, for the 2013-14 tax year of assessment and for subsequent tax years.

If you are unsure and need any help and advice on class 2 and class 4 NICs or you need to keep abreast of changes in legislation, contact Lavinia Newman, Stuart Coleman or Tonmoy Kumar to discuss how ABDS can help

ABDS Chartered Certified Accountants of Southampton.
Tel: 023 8083 6900  E-mail: abds@netaccountants.net
Great with People  Brilliant with Numbers Clear and Precise with Words
 

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