Brexit and Social Security Implications
With the Brexit transition period ending on 31 December, many businesses will need to consider what they will need to do to remain compliant with appropriate tax rules in relation to their employees. Depending on whether a trade deal is agreed or not much of the tax will be governed by the respective tax treaties the UK already has in place.
However, there will very likely be an impact on employers and the social security positions of their employees operating overseas.
The current position
The UK is currently subject to the European Social Security Regulations in respect of:
- UK employees who spend time working in another EEA location (and Switzerland); and
- Employees from EEA locations (and Switzerland) who spend time working in the UK.
These regulations ensure that employees who work across the EEA only pay social security in one country. Where applicable, the regulations enable an employee to remain within the social security system of their country of employment for a period of time, usually for up to 24 months, whilst working temporarily in another EEA location.
For UK individuals who work overseas, the application of the regulations would commonly result in a UK employee remaining within the UK National Insurance system when working in another EEA country. The same process would also apply to EEA employees working in the UK whereby they would remain subject to social security in their home location.
To ensure the application and coordination of the regulations across the EEA, the Form A1 regime is in place to administer this process. Under the regime, employees need to obtain a Form A1 (typically from the authorities in their home location) to confirm the country to which they need to make social security contributions. Conversely, this would also confirm that they are exempt from having to make social security contributions in the other EEA location they are working in.
The Posted Worker Directive and mandatory registration
The Posted Worker Directive (PWD) was updated in July 2020 to ensure continuity in respect of a number of employment related terms and conditions for employees who work temporarily in another EEA location.
As a result of the PWD, several EEA countries have introduced mandatory registration requirements which employers must adhere to when sending employees to work in their country. These include the following:
- Prior notification of any new employees;
- Registration of the employee;
- Work and salary details; and
- Providing a Form A1
The registration requirements can vary between each country and can give rise to a certain level of administrative burdens for employers.
Possible post-Brexit position
Recent guidance provided by HMRC confirms that the UK will apply the following approach to EEA social security coordination up to 31 December 2020:
- Where a UK employee is sent to work in an EEA location before 1 January 2021, HMRC will still issue a Form A1 in respect of the period of posting including where the period goes beyond 1 January 2021. This can be used as confirmation that UK National Insurance will apply for the period of the Form A1. HMRC will not currently issue Form A1 for postings after 1 January 2021 whilst the current Brexit negotiations continue;
- Where an EEA employee comes to work in the UK before 1 January 2021 and they have a Form A1 which confirms continuation in their home country social security scheme, this will still apply and no National Insurance will be due for the period stated on the Form A1. This includes periods beyond 1 January 2021 where the posting to the UK took place before this date. Likewise, it is anticipated that EEA locations will not issue Forms A1 to employees who are due to start work in the UK after 1 January 2021 whilst the negotiations continue.
- The UK has reached a reciprocal agreement with the Republic of Ireland which ensures that the current social security coordination rules in respect of moves by UK and Irish employees will continue to apply post 1 January 2021.
Whilst the above sets out the approach HMRC intends to take from a UK perspective, it remains unclear if the EU will take a similar approach with regards to UK employees working overseas in an EEA location even when they commenced their assignment prior to 31 December 2020 and have a Form A1 in place.
For example, the EU may take the contrasting view that regards will need to be given to the local domestic rules and any existing social security reciprocal agreement when determining if social security is due in the overseas EEA location.
Depending on the outcome of the negotiations there are a few possible outcomes to consider:
- Determining an employee’s social security position on a country-by-country basis
- Awaiting refreshed HMRC guidance
- The UK entering into new country-by-country social security reciprocal agreements
- Operate in accordance with historical social security agreements
- Continuance of the need to provide PWD style data in EEA locations and additional registration requirements
How can you prepare?
In preparation for the end of the Brexit transition period, there are a number measures which employers should take. These include:
- Identifying UK employees working across the EEA and EEA employees working in the UK and/or who may be in the future
- Identifying any additional employees who are home working internationally across the EEA because of the coronavirus pandemic
- Ensuring Forms A1 have been obtained and are up to date
- Ensuring PWD registrations have been completed as applicable
As a member of Baker Tilly International, MHA Carpenter Box is able to advise UK businesses on the right decisions when structuring their international operations and meeting the overseas tax compliance obligations that arise.