Pay and Benefits

If you have employees working in one or more European countries should you be deducting UK National Insurance contributions (NICs)? Are they exempt from UK NICs? Should they be paying social security contributions in the country or countries in which they work? 

 

The basic rule is that workers are only subject to the social security legislation of one Member State within the EU and other countries. This is normally the Member State where they carry out their work.

 

Therefore where the UK’s social security legislation applies, Class 1 NICs for both the employee and employer must be paid and, where applicable, Class 1A on certain taxable benefits and expenses, and Class 1B NICs on PAYE Settlement Agreements. For further information see the HM Revenue & Customs (HMRC) booklets CWG2 and CWG5.

 

However, if the social security of another Member State applies, then UK NICs will not be payable. For example, if an employee is coming to work in the UK from another Member State, such as Italy, then they would be liable to pay Class 1 NICs on their earnings from day one, unless they can show that they are liable for social security contributions in Italy. 

 

Under the old rules, the exemption would be in the form of an E101 for 12 months, which could be extended by a further 12 months with an E102.

 

Under the new arrangements form A1 replaces the E101 and E102 in the run-up to the 2012 deadline, which is the year that Member States have agreed for going electronic with the “Electronic Exchange of Social Security Information” (EESSI). 

 

Most UK businesses will not be affected by the changes and may notice little difference from the old rules. This is because the A1 retains the key features of the forms it replaces, with some minor changes. There is an added advantage to the new system, as the A1 exemption extends to 24 months not 12 months, as previously held under the E101.

 

The E101 is not disappearing completely, as it is still valid for postings made prior to 1 May 2010 for a period of 12 months and it will continue to be used for nationals of countries outside of the EU, but their initial exemption will be limited to 12 months. 

 

The reason for the change is that the European Commission has introduced new regulations, which will co-ordinate all the social security schemes within the European Union. They largely replace the old regulations that have been in place since the 1970s and have a direct impact on the UK’s NIC rules which apply to individuals moving around Europe. 

 

For example, there will no longer be special rules for international transport workers who normally work in two or more Member States. These will also include aircrews, coach and lorry drivers who will now be subject to the same rules as other international employees.

 

The changes apply to the following EU Member States: Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Republic of Ireland, Romania, Slovakia, Slovenia, Spain, Sweden and the UK. 

 

Furthermore, although the following countries are not members of the EU, they have adopted the previous EU regulations and consequently, they may adopt the new regulations as well. The countries are: Iceland, Liechtenstein, Norway (which form part of the European Economic Area (EEA)) and Switzerland, so you will need to check. 

 

Although the UK will apply the new rules to workers who normally work in two or more Member States; according to HMRC’s website, workers coming from Iceland, Liechtenstein, Norway and Switzerland will be sending people to the UK under the old rules of Regulation 1408/71/EC. For further information click here.

 

 

If you have already sent an employee to work in another Member State with form E101 prior to 1 May 2010 then, providing the E101 is valid, you do not need to apply for the new form A1. The E101 will continue to be valid under transitional rules for the remainder of the period that the E101 was issued for. 

 

The E101 is issued for a period of 12 months, but if the certificate expires after 1 May 2010 and the posting is unexpectedly extended, the worker can apply for a Portable Document A1 which would be issued under the new regulations for a further period of up to 12 months. However, the position should not exceed a period of 24 months starting with the date that the worker was originally posted.

 

Under the old regulations, the rules for an employee working in two or more Member States were quite complex, with different rules applying to transport workers. 

 

The new rules state that the social security liability arises in the Member State of residence where a substantial part of the work is carried out in that country. The new rules apply equally to transport workers. Please note that there are special rules for mariners. 

 

For example, if you have an employee from France who works less than 25 per cent of his time in the UK or less than 25 per cent of his remuneration is earned in the UK, then the majority of his work is carried out in France, indicating that a substantial amount of his work is not conducted in the UK. The French authorities would issue the form A1 after consulting with HMRC, which would indicate that France’s social security legislation would apply in this situation. 

 

However, if the employee had resided in the UK and carried out a substantial amount of his work in the UK but did some work in France, both he and his employer could apply to the International Caseworker, formerly HMRC Residence, for form A1 to show he is exempt from paying foreign contributions. If the form A1 is granted, then the employee and his employer would continue to pay Class 1 NICs and if applicable the employer would also pay Class 1A and Class 1B contributions. 

 

To apply for form A1 where an employee is going to be subject to UK legislation and pay UK NICs the employer must contact: HMRC International Caseworker, BP1301, HM Revenue & Customs, Benton Park View, Newcastle-Upon-Tyne, NE98 1ZZ.

 

Applications should be made using form CA3822 which can be downloaded fromwww.hmrc.gov.uk/forms/ca3822.pdf. " target="_blank"> HMRC’s website. However, if the employee is working in two or more countries which form part of the EEA, then the application should be made on form CA8421 which can also be downloaded from HMRC’s website.

 

Under the new rules from 1 May 2010 if an employee is subject to Class 1 NI, even though their employer is in another Member State, they would be under the same obligations to operate NICs as an employer with a place of business in the UK. Consequently, the foreign employer would be responsible for all the same obligations as UK employers which would mean deducting employee’s and employer’s NICs, keeping the necessary records and filing an end of year return to HMRC online at year end. 

 

Under the old rules a host employer would have been responsible for the NICs. With the new arrangements it would be acceptable for the foreign employer to use that host employer to act as an agent for them in respect of NICs.

 

However, if the foreign employer in another Member State did not have an agent operating NICs on his behalf then the foreign employer would need to contact HMRC to register for an NI only scheme. Registration can be completed by telephone or email and the employer would need to state that he was registering under EC Regulations 883/2004. 

 

Equally where an employee is subject to the contribution rules of another Member State, the employer would also be subject to the Member State’s legislation which would include an obligation to pay the necessary employer’s contributions in that country. So while some of the new rules have simplified things, this particular issue has been made more complex.

 

To register as an employer you will need to supply HMRC with the following information: name, address and contact telephone number, contact email address (if you are registering by email), NI number, taxpayer reference, name of the business, type of business and the business’s trading address.

 

In addition you will need to supply information regarding employees and the contact details for the person or organisation running the payroll.

Further information is also required by HMRC but this is dependent on the type of organisation such as a partnership, domestic employer, or limited company.

 

For further information click here.

 

Linda Pullan is Head of Payroll Alliance.