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New NI rules affect EU workers and employers

05 March 2010

From 1 May 2010, the National Insurance (NI) rules that apply to employees who work in more than one EU Member State will change.

The current general rule is that employees are subject to the social security legislation of the Member State in which they carry on their work. This rule remains under the new regulations.

But there are some exceptions to this general rule and this is where the changes take place.

UK employees working temporarily in another Member State

Currently, providing certain conditions are complied with and HM Revenue & Customs (HMRC) agrees, such an employee will remain subject to UK NI if, at the outset, the work is not expected to last more than 12 months.

However, this can be extended for a further 12 months, subject to the agreement of HMRC and the other Member State.

This rule allows employees to continue to pay UK NI thereby protecting their entitlement to UK social security benefits such as the state pension and unemployment benefits, whilst not having to pay foreign social security contributions.

Under the new rules, the need to apply for an extension after 12 months will be removed and a 24 month period will be allowed from the outset.

Also, the two current forms (E101: used for the first 12 months; E102: used when an extension is applied for) will be replaced by a single form (A1).

Employees working in two or more Member States

Currently, complex rules apply to determine which social security contributions should be paid. Broadly, and with the exception of transport workers, such employees pay social security contributions in the Member State in which they reside if they also work there.

If the Member State they work and reside in is different, then they pay social security contributions in the Member State where their employer is registered or has a place of business.

From 1 May 2010, new rules apply. The general position is that social security contributions must be paid in the Member State in which the employee resides if he pursues a substantial part of his activity in that Member State or if he is employed by various employers or undertakings whose registered office or place of business is in different Member States.

Only if the employee does not pursue a substantial part of his activity in the Member State of residence and he is employed by a single employer will he have to pay social security contributions in the Member State in which the registered office or place of business of his employer is situated.

These new rules should mean that most affected employees pay social security contributions in the Member State in which they reside. The current different rules that apply to transport workers will no longer apply.

HMRC has said that in determining whether a ‘substantial part’ of an employee’s activity takes place in a Member State, they will look at:

If less than 25% of an employee’s working time is in the UK and/or less than 25% of his remuneration is earned in the UK, this will indicate that a ‘substantial part’ is not in the UK. However, HMRC may take other criteria into account (no further specifics have been given) and may look at the past and future 12 month periods.

If an employee resides in the UK but works in two or more Member States, Form A1 should be completed. However, if the employee does not reside in the UK but works in the UK, an application should be made to the authorities of the Member State of residence and they will, after contacting HMRC, make a decision about which social security contributions should be paid.

Third Country Nationals

As the UK has opted out of laws extending the new regulations to Third Country Nationals (i.e. individuals from outside the EU), the current rules and not the new rules, will continue to apply in the UK to Third Country Nationals legally resident in a Member State.

Conclusion

It is possible that some of the details may change as work is still going on across the EU in preparation for these changes.

In addition, there will be important transitional rules, the details of which are still being discussed, and which will affect those employers and employees currently operating such arrangements under the existing rules.

Employers and employees who may be affected should seek specialist advice immediately to ensure that they are in a position to comply with the new regime from 1 May 2010.

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Tom Wilde

Solicitor
T: 03700 86 8713
I: +44 (0)118 965 8713
E: tom.wilde@shoosmiths.co.uk