HM Revenue and Customs (HMRC), the U.K. authority responsible for tax and social security, has clarified that individuals temporarily posted to European Union (EU) member states from the U.K., with suspended U.K. contracts and local host-country contracts, are not considered posted workers in the context of social security. Consequently, they are not subject to U.K. social security during their temporary posting.
WHY THIS MATTERS
HMRC’s guidance helps employers understand the limitation in the application of social security rules to mobile employees under current U.K.-EU legislation.
Employees subject to the rules of the Social Security Protocol are not eligible for A1 certificates if their U.K. employment contract is temporarily suspended and the local host-country contract is put in place for the duration of their posting. In the absence of A1 certificates, these employees will be liable to social security legislation in their host country.
U.K. employers posting workers to the EU with suspended U.K. employment contracts must adhere to the social security requirements of the host country.
Context
Since the U.K. left the EU (commonly referred to as “Brexit”), the Protocol on Social Security Coordination (“the Protocol”), effective from 1 January 2021, governs the social security position of individuals moving between the U.K. and the European Union1.
The rules under the Protocol for determining the applicable social security legislation stipulate that an employee posted up to 24 months is covered by social security in the home country, provided all conditions for posting are met. If a direct relationship between the employer and the employee does not exist during the posting, an employee will not be considered to be a posted worker2, thus, an A1 certificate would not be approved by HMRC. Therefore, an employee will be subject to the social security legislation of the state of work during the posting.
Highlights
The effects of the new HMRC interpretation of the rules for security rules3 can be illustrated in the following example:
A U.K. company temporarily posts a U.K. employee to work in a company situated in Belgium. The employment contract with the U.K. company is suspended during posting. The employee concludes an employment contract with the Belgium company for the duration of the posting and claims remuneration from the Belgium company.
Social Security Assessment: In the example above, conditions for a posting under social security legislation in the home country are not met since the suspended employment relationship between the U.K. company and the employee does not contain sufficient labour law ties to warrant the continued application of the legislation of the home country. Pursuant to Article 10 (3) (a)4 of the Protocol, the employee is subject to the Belgium legislation for social security and an application for an A1 certificate would be rejected by HMRC.
However, if the employee in the example above has exercised his right to free movement prior to Brexit (by 31 December 2020 at the latest), under certain circumstances, the employee will remain eligible for social security coverage under European Regulation 883/2004 for coordination of social security systems.5 In such instance, continued coverage under U.K. social security could be an option.
KPMG LLP (U.K.) INSIGHTS
HMRC requested a provision in the Protocol allowing the U.K. and EU authorities to grant exceptions to the rules by mutual agreement. However, the EU did not accommodate this request, so there are no exceptions to the rules in the Protocol. Therefore, in circumstances where employees’ home contracts are suspended for the duration of their assignment, no exception will apply to the general principle ‘pay where you work.’
To comply, employers should:
- review their workforce to identify impacted employees;
- consider enrolling employees in the U.K. social security scheme voluntarily to avoid gaps in their social security records;
- make sure social security registration in the host country is in place.
When a company considers updates to its policy, it will be important to understand the details, such as the difference between suspension of contract versus dormant contract. Suspension and dormancy are both temporary interruptions to the employment relationship. However, there are key differences between the two, particularly in terms of pay, benefits, and dismissal.
The provisions on dismissal during suspension and dormancy will vary depending on the specific employment contract and applicable laws. However, in general, it is more difficult to dismiss an employee during suspension than during dormancy. This is because the employee is still technically employed by the company during suspension, whereas he or she is not during dormancy.
In respect of the company pension contributions, whether or not these will continue during suspension or dormancy will depend on the specific pension scheme. Some schemes may allow contributions to continue, while others may not. It is important to check the specific scheme rules to be sure, but company pension may continue during suspension.
The specific provisions on suspension and dormancy will vary depending on the jurisdiction. It is important to check the applicable laws in the relevant jurisdiction.
Employers with questions and concerns around appropriate next steps in light of this clarification by HMRC may wish to contact their usual tax or social security professional or a member of the Social Security team with KPMG in the U.K. for support and guidance.
Footnotes:
1 European Commission, “The EU-UK Trade and Cooperation Agreement”. For related coverage, see GMS Flash Alert 2021-010, 8 January 2021.
2 "Practical Guide on the Applicable Legislation in the European Union (EU), the European Economic Area (EEA) and in Switzerland," prepared by the Administrative Commission for the Coordination of Social Security Systems (December 2013).
3 HMRC via Expat Forum, “Response to A1 Certificate query”, 29-Aug-2024.
4 Art 10.3(a) of the Protocol or 11.(3)(a) of the EU Regulation 883/2004.
5 Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community, 2019/C 384 I/01, OJ C 384I, 12 November 2019, pp. 1-177.
Official Journal of the European Union, "Recommendation No 1/2024 of the Specialised Committee on Social Security Coordination...."
For related coverage, see GMS Flash Alert 2021-010, 8 January 2021.
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