Sleeping Partners NIC alert

Are sleeping partners liable to pay National Insurance Contributions (NICs)? 

This is a freeview 'At a glance' guide to sleeping partners and their liability to National Insurance.

At a glance

Following a change of view, since 2013, HMRC have considered that sleeping 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.

• Sleeping partners take no active part in running the business.
• Partners who did not pay Class 2 or Class 4 NICs for pre 2013 periods were not required to pay those contributions.
• This measure only applies to partners who are individuals.

HMRC consider that this can impact partners of a general partnership, a limited partnership and members of limited liability partnerships.

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.
• A married woman or widow with reduced liability.
• 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 

HMRC 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.

Comment

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

Useful guides on this topic

Partnerships: Unlimited or limited?
An introduction to partnerships. What types of partnership are there? What are the differences? 

National Insurance: What's the maximum payable?
What are the maximum limits for National Insurance Contributions (NICs)?