Tax Factor

05 August 2010

New National Insurance contribution rules for people working in the European Economic Area (EEA)

Employees and employers need to be aware of the changes that came into effect from 1 May 2010. In his article we set out the main issues to be considered.

Summary of the changes

Since 1 May 2010 new National Insurance rules have applied for employees working in two or more member states. The changes come about as a result of EU regulations which are intended to co-ordinate EU Social Security rules.  Form E101, certifying where an individual pays Social Security Contributions, has been replaced by Form A1. 

Which countries are covered by the new rules?

The new rules apply to people working in the European Economic Area (EEA) i.e. in:

Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany,  Greece, Hungary, Iceland, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom. Switzerland, although not in the EEA, is also covered by the new rules.

Who is affected by the new rules?

The new rules apply to:-

·    Nationals of EEA states or Switzerland;

·    Stateless persons or refugees permanently living in the EEA:

·    Employed posted workers: employed persons who normally work in the UK but who work temporarily in another EEA country or Switzerland.

What is the basic rule?

If an employee works in another EEA country or Switzerland for an EEA or Swiss employer (this includes a UK employer) then the worker will usually pay Social Security Contributions in the country in which he or she works.

What is the position if an employee normally works in the UK but who works temporarily in another EEA country or Switzerland?

If the employee is not expected to work more than 24 months overseas, then the employee will usually continue to pay National Insurance in the UK as if he or she were here.  The employer must apply to HMRC NICO International Caseworker for form A1 (previously form E101) before the employee works overseas.  Once a form A1 is issued then there is generally an exemption from contributions in the other EEA country.

What is the position if an employee normally works in two or more EEA countries or Switzerland?

Special rules apply for both employers and employees where the employee’s pattern of work involves either simultaneously carrying on employment activity in two or more EEA countries, or the activity alternates between EEA countries. These also cover people who move around much more in the course of their work, for example, those involved in international transport or touring musicians.

Since 1st May 2010:

·    The legislation of the Member State of residence applies if the employee pursues a substantial part of his/her activity in that Member State or,

·    If the worker does not pursue a substantive part of their activity in the Member State of residence, he/she is subject to the legislation of the Member State in which the registered office or place of business of the undertaking employing him/her is situated.

·    If the employer is not registered and has no place of business in a Member State, then the legislation of the Member State of residence applies, whether or not the worker has substantial activities there.

What does HMRC take into account in determining whether a substantial part of an employee’s activity takes place in a member state?

HMRC will look at indicators such as working time and/or remuneration.  If less than 25% of the employee’s working time is undertaken in the UK, and/or less than 25% of the remuneration is generated in the UK, then this will be an indication that a substantial part of the employee’s activity takes place outside the UK.  HMRC will generally look at a pattern over a historical 12 months period and the likely position in the coming 12 months.  HMRC may look at other factors    depending on the employee’s circumstances.

What are the procedures to be adopted when an employee works in two or more Member States?

The main procedural rules are:

·    If the employee resides in the UK, the employer or employee should apply to HMRC NICO International Caseworker for a provisional decision on whether or not they should be subject to UK legislation.

·    HMRC NICO International Caseworker will notify the employer, employee and the other Member States involved of its provisional decision.

·    That provisional determination becomes definitive unless it is challenged by another Member State within two months.

·    If the legislation applies, HMRC NICO International Caseworker will issue a form A1.

Employees who work in more than one EEA state or in Switzerland need to be aware of these new rules, as do employers who take on individuals from these countries and/or who send employees to other EEA countries to work. If you are unsure as to whether you or your employees are affected then please contact us for further advice.