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HMRC claim to class 4 liability “on shaky foundations”, says Baker Tilly partner
Sleeping partners are liable to class 2 and class 4 National Insurance (NI) in respect of their taxable profits, HMRC has announced in a policy U-turn.
The revised stance – which follows a review by the Revenue and contradicts the department's previous position – means sleeping and inactive limited partners who do not already pay class 2 NI as a result of being self employed must advise the tax department of their status and either arrange to make contributions or apply for exception or deferment.
Affected parties should register on form SA401 and record at box 15 the nature of the business as either sleeping partner or inactive limited partner.
Partners should account for class 4 National Insurance, if any, for the 2013/14 year of assessment and subsequent tax years.
Partners who made contributions for past years will not be entitled to a refund of class 2 NI or overpayment relief in respect of class 4 NI, said HMRC, because the amounts will have been paid in accordance with the law.
Baker Tilly partner David Heaton remarked that the definition in NI law appears to “draw anyone engaged in a UK business, even in a limited way, into liability for class 2”, but he suggested that the Revenue’s position on class 4 liability was less sound.
“Class 4 is chargeable on profits ‘immediately derived’ from carrying on trades or professions, and limited partners who are nothing more than investors, taking no part in the management of the business, are not in scope,” said Heaton.
He added, “Many large property investments are structured as limited partnerships, with the general partner, usually a corporate body, undertaking the management. The investors who are limited partners may well have a class 2 liability, on the plain words of the definition in social security law, but HMRC’s claim to class 4 liability looks to be built on very shaky foundations.”
