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No-deal Brexit risks for UK businesses with workers in the EU

Workforce mobility is under threat as UK employers weigh up the potential social security and tax implications of a no-deal Brexit for employees working in EU countries. How should organisations respond?

Thousands of UK businesses are already grappling with the implications for trade with EU countries when the Brexit transition period ends on 31 December, including arrangements for employees who travel to EU countries for extended periods.

They are now also seeing an increased push by employees to continue working remotely in the wake of COVID-19 shutdowns, including those wanting to work from their home countries or while staying with relatives outside of the UK.

For many, the combined challenges of Brexit and COVID-19 are creating a whole new set of headaches relating to employees working remotely from countries outside the UK.

Without careful consideration and planning, these businesses – and their employees – risk a crippling ‘double whammy’ of tax and social security compliance in multiple countries.

Social security after Brexit for workers in the EU

One of the key areas of uncertainty is the treatment of social security arrangements for UK employees working in EU countries.

“What we have the risk of here, the very clear and present danger, is a situation where there are dual obligations.”
– Richard Maitland

“Social security is a huge issue for Brexit,” said Richard Maitland, a partner in the London-based Baker Tilly firm, MHA MacIntyre Hudson, specialising in employment tax.

“During the Brexit transition period, the UK has continued to participate in the EU’s reciprocal arrangements for social security, which protect the rights of EU nationals across all member countries.

“For example, the A1 certificate allows individuals who are on assignment from one country to another to continue paying into their home country social security system rather than having to pay into the social security system of their host country.

“That’s really important, because that makes social security so much easier for people to administer, not just for employers, but also for individuals themselves.”

Unfortunately, despite the need for coordinated social security arrangements, it is not clear whether any sort of agreement will be reached between the UK and EU member countries before the end of the Brexit transition period.

“What we have the risk of here, the very clear and present danger, is a situation where there are dual obligations,” Mr Maitland said.

“Let’s take the example of a UK national on assignment to France or to Germany, both of those countries have very extensive Social Security obligations. Clearly that’s going to be onerous for both employers and employees.

“It is also a pretty major disincentive to individuals wanting to work remotely outside the UK for reasons related to COVID-19.”

Tax considerations for employers

Similar issues must also be considered in relation to tax. How long will the employee be working from the host country and will this trigger tax resident status? Will it raise any other tax issues for their employer?

“Many of my clients have gone through that process and asked, is it worth the potential headaches around compliance? With all of this happening at the same time, you really do appreciate the double whammy of challenges that you’re facing from Brexit and COVID.”
– Richard Maitland

The UK currently has a Double Tax Treaty (DTT) with most countries around the world, including all EU members, which exempts UK employees from paying income tax in the host country as well as the UK for short periods of remote work, usually totalling less than 183 days over 12 months.

However, the conditions of DTTs can vary between countries, so employers and employees must consider the circumstances in each country when considering remote work outside the UK.

Although business leaders can usually rely on the conditions of the DTTs to protect employees from suffering double taxation, there is still a risk that employees working outside their country of employment can create unforeseen compliance obligations in the overseas country where they perform their duties, such as additional payroll and reporting obligations. This can result in unexpected costs for your business as well as potential compliance failings.

Other tax considerations include potentially triggering permanent establishment in the host countries for corporation tax purposes.

“I think it’s likely to be more of a personal tax obligation for employees,” Mr Maitland said. “But that’s not to say that those countries won’t also put obligations on to employers.

“Many of my clients have gone through that process and asked, is it worth the potential headaches around compliance? With all of this happening at the same time, you really do appreciate the double whammy of challenges that you’re facing from Brexit and COVID.

“We hope this will be resolved by 1 January, but we are getting close to the situation where, in the event of a no-deal Brexit, we will have to revert to the underlying social security agreements and tax agreements that were agreed by the UK with EU member states before the advent of the EU.”

How should UK employers respond?

Continued uncertainty around tax and social security issues is causing a lot of stress for employers, who must think of which employees are globally mobile, which EU countries they might be assigned to or work from and whether those countries have pre-EU social security arrangements with the UK.

“As an employer, you need to look at your situation on a country by country basis,” Mr Maitland said.

“If no country or jurisdiction can agree on a combined treatment, then a potential double social security charge would need to be certainly factored in in terms of potential costs and administration.”

Brexit and working in the EU: Key questions

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MHA MacIntyre Hudson

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