What impact would a no-deal Brexit have on social security contributions?
12 November 2020
With the promised “oven-ready” Brexit failing to materialise and the prospect of no deal apparently growing each day, this article considers the likely effect of a no-deal Brexit on employers’ and employees’ liability for social security contributions where a UK employee is working in a European Economic Area (EEA) country or Switzerland.
Background - EU social security rules
The relevant EU rules in this area provide a framework for protecting an individual's social security rights if the individual moves within the EEA countries and Switzerland. A fundamental principle underlying the framework is that an individual is subject to the laws of one country only. The rules prevent employers and employees paying social security contributions in two countries and ensure that those working in one country can enjoy the social security benefits of a permanent resident. The framework also ensures equality of treatment of EU nationals regardless of where they are in the EU.
The EU rules accordingly provide that the employee and employer shall pay social security contributions in only one country, which is generally the one in which the employee is physically working. There are two main exceptions to this:
- Where an employee of one country is sent by their employer to work in a different EEA country or Switzerland for a temporary period of up to two years, it is possible for the employer and employee to continue to pay social security in the home country if certain conditions are satisfied.
- Where an employee is working in two or more EEA member states/Switzerland (i.e. spending at least 5% of their working time in each member state), the rules are a little more complex. If the employee works more than 25% of their time (measured over a 12-month period) in the country in which they are resident for social security purposes, the employee and employer pay social security in that member state. If the employee works 25% or less of their time in their country of residence and only has one employer, social security is due in the country in which the employer is resident. There are further rules that apply if the employee has two or more employers.
In addition, if it is in the employee’s interest to remain within their home country’s social security system, it may be possible to apply for a special exception. This route is often used in the situation where an employee’s posting is expected to last more than two years.
In terms of the practicalities, if a UK employer is sending a UK employee to work in a country covered by the EU rules, it should apply to HMRC for an A1 or E101 certificate.
If a UK employee is working in two or more countries covered by the EU rules, they should apply to HMRC for an A1 or E101 certificate or to the social security authorities in the country in which the employee is resident (if different).
In either case, the effect of the certificate is to confirm the country in which social security contributions should be paid and prevent double contributions.
The future position - deal or no deal?
The UK left the EU at the end of 2019, with the Withdrawal Agreement confirming that the current EU social security rules would continue to apply until the end of the transition period - which is 31 December 2020 (unless there is an extension).
Irrespective of whether the EU and UK agree a trade deal, the EU rules will continue to apply to UK nationals and their family members living or working in the EEA/Switzerland at the end of the transition period (and vice versa). Existing A1 and E101 certificates issued for individuals within the scope of the Withdrawal Agreement will therefore be honoured provided that the situation remains unchanged.
But what is the position in relation to new arrangements? HMRC, in its October 2020 Employer Bulletin, has indicated that for arrangements that begin after the end of transition period applications for A1 or E101 certificates should continue to be made. HMRC has, however, indicated that while negotiations are ongoing it will only be able to process applications for certain individuals – principally those within the scope of the Withdrawal Agreement.
HMRC has said further guidance will be issued in due course. The position is likely to depend on whether a deal is concluded between the EU and the UK before the end of the transition period.
Social security contributions after a no-deal Brexit
Apart from for Ireland, with which the UK has agreed a reciprocal contributions social security agreement under which the EU rules will continue to apply, the position is unclear.
Prior to the EU social security rules being implemented, the UK had negotiated reciprocal agreements dealing with social security contributions with some of the other EEA countries. However, the UK government considers that these agreements are no longer valid. We understand some EU countries share this view, while others do not.
If the old reciprocal social security agreements do not apply and a new bilateral agreement with the relevant country is not agreed, the position on contributions would be determined in accordance with the domestic law of each country. This could potentially result in a contributions liability in both the UK and the host country:
- The UK. At least initially, the UK will continue to apply the EU rules unilaterally in accordance with regulations made under the European Union (Withdrawal) Act 2018. The government, however, has power to amend these regulations to remove barriers and support labour mobility between countries. This means there is considerable uncertainty as to what degree of co-ordination there might be in the long term after the transition period ends and a “no deal” becomes permanent.
- The host country. Whether the host country will be able to enforce any employer social security liability against a UK business will, however, depend on the circumstances.
Social security position if a deal is agreed
The UK government and the European Commission have each published draft treaty texts on social security co-ordination. Both sides have included reciprocal provisions to prevent social security contributions being due in both the home and host countries so, from this perspective, there does not appear to be much difference between the parties. The more contentious issue relates to the “exportability” of benefits, an issue which is politically important and so may delay any deal on social security contributions.
What steps should businesses take now?
UK businesses with employees who are likely to be working in the EEA or Switzerland after 31 December 2020 should review the position as soon as possible and consider:
- Whether an A1 or E101 certificate has already been granted and, if so, its expiry date.
- Whether any proposed secondments within the scope of the Withdrawal Agreement should be brought forward to begin before 31 December 2020 so that a certificate can be applied for before the end of the year.
- Whether to seek social security advice in the host country for any arrangements entered into on or after 1 January 2021 or for any existing arrangements where the circumstances change.
- If a dual contributions liability is likely to arise, whether the business or the individual should bear the increased costs.
HMRC’s October Bulletin sought to reassure employers and individuals that the government is working with the EU to establish “practical, reciprocal provisions on social security co-ordination…including preventing dual concurrent social security contributions liabilities”. Pending such an agreement being reached, this remains an area in which businesses face considerable uncertainty and a potential increase in costs.
Following the UK’s departure from the EU, the Trade and Cooperation Agreement sets out the shape of the ongoing future relationship between the UK and the EU and provides some degree of certainty for UK businesses.