When the Brexit transition period ended on Jan.1, 2021, the deal between the United Kingdom and the European Union, the Trade and Co-operation Agreement, went into effect. Familiar EU regulations governing how various countries’ social security programs are applied for internationally mobile employees are now superseded by the newly drafted Social Security Coordination Protocol within this agreement.
For U.S. companies with internationally mobile employees in Europe, understanding the impact of these changes will be key to ensuring continuing compliance and managing tax risk.
The new protocol
The protocol acts to protect an individual’s access to healthcare when outside their home country and in the EU or the U.K. It follows the previous principle that social security should only be payable in one country at a time, where both employer and employee social security will be due. This will normally be in the country in which the work is being carried out, with an exception for both “multi-state workers” and “detached workers.” For U.S. employers, understanding the different categories of workers and identifying how the new rules will apply to their employees should be a priority for early 2021.
These new rules will apply to assignments, or for employees starting to work in multiple locations, including the U.K. and at least one EU country, commencing from Jan. 1 onwards. Under the transitional provisions in the Brexit Withdrawal Agreement, any arrangements that began before Dec. 31, 2020, continue to be governed by the old EU regulations for as long as the arrangement continues unchanged (the definition of a “change” is broadly drawn so advice should be sought on this point).
Employers will therefore also need to understand and apply two sets of rules, alongside the grandfathering provisions, and will need to take care to ensure that they meet their obligations to register and remit social security in the relevant country.
The first exception to the general rule of paying social security in the country where the work is carried out applies to “detached workers” — those sent by their employer to work overseas in a single location for a temporary period.
Each EU country had the option to opt in or opt out of the new detached worker rules with the U.K. Positively, all EU countries have agreed to apply the detached worker rules based on updated guidance from the U.K.’s tax authority, HM Revenue & Customs. Although there are some significant differences with the old EU regulations, this is still a positive move to provide certainty and some element of consistency during the initial transitional period. This means that individuals can remain in home country social security for assignments of up to 24 months between the EU and the U.K. A certificate of coverage should be applied for in the home country in these circumstances.
“Having all countries opt in to the new protocol is a critical step,” said Richard Tonge, Global Mobility Services principal at Grant Thornton. “While the new rules are certainly complex, fragmented rules could have created significant compliance burden on U.S. employers. Instead, consistency gives some simplification.”
It is important to note that there is no clause for extending a certificate beyond the 24-month period as there was in the old European Economic Area (EEA) regulations. It will therefore be critical to effectively structure and manage assignments to manage social security contributions and costs.
It is also important to note that EU countries have the option to opt out of these rules at any time with just over a month’s notice. If a country chooses to opt out, the individual is required to pay social security in the country in which they are physically working for any assignments starting after the opt-out date. Depending on the host country, this could result in significant additional social security costs for employers.
The second exception from the general rule applies to individuals working in the U.K. and one or more EU member state(s) over the course of a year. Unlike the detached worker rules, both the U.K. and all EU member states are automatically covered by the multi-state worker rules. These rules are drafted to align to the EU regulations for multi-state workers.
Non-EU member states
For EEA countries (Norway, Iceland, Liechtenstein and Switzerland) who are outside the EU but participate in the EU social security regulations, the new protocol will not apply. Instead, new rules will apply based on the bilateral social security agreements between these countries and the U.K. Of these countries, only Liechtenstein does not have an agreement with the U.K. and so domestic rules in both locations will need to be followed, resulting in a risk of double social security contributions.
Actions for employers
Compliance will still be challenging for employers who are still adjusting to a challenging employee mobility landscape caused by COVID-19.
"The year 2020 brought a lot of uncertainty and curveballs, not just because of COVID-19 but also the potential fallout of the finalities of Brexit,” said Nishant Mittal, SVP Business Travel at Topia. “The year 2021 is likely to compel organizations into action to deal with the new normal of the post-Brexit, COVID-19 remote working talent footprint."
Given the changes to the international social security regulations, employers should be considering the impact it may have on their business and globally mobile employees. Companies will want to take the following steps and address these questions:
- Does the business have accurate visibility and reporting into which employees are currently or potentially working outside of their home location, and for how long?
- Does the business’s current global mobility policy need adjusting to account for the new rules (e.g. should assignments be limited to 24 months to allow individuals to remain in home country social security)?
- For countries that opt out of the detached worker rules or for assignments of more than two years, are there registration and compliance requirements in host locations?
- Will mobility tax costs change? Employers should consider re-assessing cost projections for assignments between the U.K. and the EU where the host rather than the home country social security will apply (either due to opt-out or after the 24-month period).
- Will the business increase its scenario planning and financial reforecasting as the regulatory landscape shifts?
- Is the business prepared to update tools and technology as countries opt in or possibly opt out of the new arrangements in the future?
- Does the business ensure that A1 certificates that allow for home country contributions are in place for assignments that began under the old regulations and does it plan for potential changes to arrangements in advance of putting them into place?
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