Until now if you were a sleeping partner – that is, you took no active part in running the business and only supplied capital and took a share of the profits then you were exempt from National Insurance.
But HMRC have changed their mind, in an announcement on 4th April 2013 they said:
HMRC now considers that Sleeping and inactive Limited Partners are—and have in the past been—liable to pay Class 2 National Insurance contributions (NICs) as self employed earners and Class 4 NICs in respect of their taxable profits. “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.
Sleeping or inactive Limited Partners who have not paid Class 2 or Class 4 NICs for a past period will not be required by HMRC to pay those contributions.
Sleeping and inactive Limited Partners who are not already paying Class 2 NICs should register on form SA401. Such partners should record the nature of the business being carried out at box 15 on the form as either Sleeping Partner or inactive Limited Partner.
Not good news if you’re an investor who wants a share of the profits, sounds like a good reason to convert to a limited company and pay dividends.