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BREXIT: Leaving EU would affect National Insurance for international employees

FOCUS: The UK's vote to leave the EU will potentially affect National Insurance contributions (NICs) and other social security arrangements that apply to the assignment and relocation of internationally mobile executives within the EU  and European Economic Area (EEA).03 Aug 2016

Current EU regulations provide a clear and practical system for determining how social security applies in the context of EEA assignments and cross-border working. These prevent contributions being payable in more than one jurisdiction at the same time and, in some cases, provide a degree of flexibility for employers to choose where contributions are payable. Many companies keep employees within the UK system where possible, for example, to take advantage of its low NIC rates.

If a UK national goes to work in another member of the EU, Switzerland, Norway, Iceland and Liechtenstein, he or she will not be subject to NICs or other social security contributions (SSCs) in both states. Instead, SSCs will usually be paid in the state in which the work is carried out.

There are exceptions to this for temporary or short term assignments and these can be very helpful, both in terms of certainty and minimising compliance requirements for UK employers and for employees who are able to remain in their 'home' system with the advantages that brings in terms of contribution history and access to benefits.

Where the worker works in more than one EEA jurisdiction at the same time there are 'tie-breaker' provisions, which broadly mean that if a worker works for at least 20% of the time in his country of residence then SSCs will be due in that country. If not, SSCs are usually due in the country where the employer is resident.

For workers moving outside of the EEA, bilateral social security contribution treaties apply for a handful of jurisdictions such as the USA, but outside of that the position can be messy with the potential for dual claims for SSCs and uncertainty over what is payable and where.

For example, the UK may require NICs to be paid for a year after leaving the UK if a worker's employer still has a place of business in the UK. The country that the worker moves to may have its own requirements about where SSC should be paid.

The implications of Brexit

If the UK remains part of the EEA or achieves an equivalent status then we would expect the regulations to continue to apply as they do for Switzerland, Iceland, Norway and Liechtenstein. It is interesting to note in this context that Switzerland is not an EEA member, although it has signed up to the single market.

If, on the other hand, the UK chooses the path of complete withdrawal, reciprocal social security arrangements would have to be added to the long list of matters where a negotiated agreement is required. It is also, perhaps, questionable whether arrangements equivalent to the current system would be put in place if the UK has rejected the single market and associated freedom of movement principles.

Assuming that they are put in place, some uncertainty arises over what, if any, special features will be agreed, and what happens when EU regulations are changed in future. Multinational employers will clearly want to avoid having to deal with separate systems.

Failing that, the UK would have to fall back on bilateral social security treaties with the EEA countries. Such agreements were in place before the UK joined the EU, but these would need to be updated and replaced.

For the time being, employers can only proceed on the basis of the current system and hope that common sense prevails. Even if changes are made, it seems likely that transitional arrangements will be put in place and existing entitlement agreements honoured. However, as the political and legal landscape continues to alter and develop throughout the Brexit process, employers and representative bodies should press for social security arrangements to be clarified.

Chris Thomas is an employment tax expert with Pinsent Masons, the law firm behind Out-Law.com.