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Class 4 NIC for sleeping/inactive partners

Class 4 NIC for sleeping/inactive partners

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HMRC "reviewed" its interpretation of Social Security law and decided that sleeping/inactive partners have always been liable for Class 2 and Class 4 NICs. They have stated that their revised interpretation of the law will be enforced from 13/14 onwards.

We act for a number of husband and wife partnerships which will be affected by this change. In all these cases the sleeping partnership arrangement is genuine. So the sleeping partner has taken no active role in the day to day management and execution of partnership activities, but has provided capital and has a financial interest in the partnership and shares in the profits/losses.

In order for the arrangements to be watertight, we have ensured that the partners have had a simple Partnership Agreement drawn up by a firm of solicitors, which details that one of the partners is a sleeping partner and sets out all the conditions relating thereto.

Is anyone aware of any challenges which have been or will be mounted regarding HMRC's arbitrary decision?

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Portia profile image
By Portia Nina Levin
09th Sep 2014 14:06

I would fight a different fight if I were you

Class 4 NIC is payable on all profits derived from the carrying on of a trade and which is charged to Income Tax under chapter 2 of part 2 of ITTOIA 2005, irrespective of whether it is assessable on an active partner or a sleeping partner.

Class 2 NIC is payable by every self-employed earner.

Employment for that purpose includes any trade, business, profession, office or vocation, and the terms employed and self-employed are construed accordingly.

And a partnership is the relation that subsists between two or more persons carrying on a business in common.

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By thomas34
09th Sep 2014 15:35

Sleeping Partners

The OP is correct in all respects - HMRC have, after I don't know how many years, decided to reinterpret the legislation unilaterally. I guess it's up to someone with deep pockets to challenge them.

I think the point was that since class 4 and class 2 seem to be inextricably linked, exemption from class 2 immediately saved the non-working partner a lot of money in respect of class 4. I was alerted to this "loophole" by a renowned N.I. lecturer whose name eludes me but someone who gave HMG advice on the subject.

HMRC aren't going to act retrospectively but I would view this not as a favour to taxpayers but as a sign of weakness in their argument. If they are saying that sleeping partners should have always paid class 2 they should be protecting the public purse by raising assessments where possible. The sleeping partner should obviously be paying class 3 if they wish to protect their state pension.

 

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Portia profile image
By Portia Nina Levin
09th Sep 2014 15:42

Actually I am correct in all respects

My points were extracted directly from the legislation. It is a new interpretation by HMRC, but nobody has a cat in hell's chance of defeating it.

Because of their former interpretation, however, they cannot go back retrospectively because of the legitimate expectation that that former interpretation provides.

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Replying to Cathy Milligan:
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By thomas34
09th Sep 2014 16:43

Portia

Portia Nina Levin wrote:

My points were extracted directly from the legislation. It is a new interpretation by HMRC, but nobody has a cat in hell's chance of defeating it.

Because of their former interpretation, however, they cannot go back retrospectively because of the legitimate expectation that that former interpretation provides.

A bit like the Arctic Systems case then when HMRC tried to resurrect 80 year old settlements legislation, spent several years in various tribunals and Courts, and with what result?

 

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By Elvis11
09th Sep 2014 17:08

I always feel that HMRC are on shaky ground when they decide to change their mind about something where there has been no change in legislation, although sadly this is not uncommon.

David Heaton, who I believe writes the Tollys NIC book was quoted in Taxation as below:

 

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.

This is why I wondered whether any contributors were aware of anyone challenging HMRC.

 

 

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