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United Kingdom overview of regulatory changes affecting human capital as a result of Brexit

Executive summary

In considering the technical implications of the UK leaving the EU from a human capital perspective much focus has been on the changes to the immigration regime that “Brexit” will herald. Less attention has been paid to the other technical issues applicable to people such as social security, state pensions, employment law and taxation. Changes in these areas, either at the point of Brexit, or over time, could impact the cost of doing business and the social welfare of employees who have a current or long term connections to the UK as a place of work.

  1. The social security landscape for internationally mobile employees could change profoundly for those coming to or leaving the UK. This could impact the ability of employers to manage costs of internationally mobile employees and to facilitate the movement needed to fulfil commercial needs and talent development programmes.
  2. A Briefing Paper for MPs and their staff has been published by the House of Commons Library titled “Brexit and State Pensions” which sets out the current framework for the co-ordination of old age pensions. It also sets out what could happen in the future regarding reciprocal entitlements, with the eventual position to depend on the outcome of negotiations. 
  3. On employment law, initially at least, it is expected that the same rules and laws will continue to apply as the UK Government has confirmed that it will ensure the protections and standards that currently benefit workers by virtue of the UK’s membership of the EU will remain. There are, however, a number of key employment law areas that could be reviewed and the UK courts will no longer be bound by the decisions of the Court of Justice of the European Union.
  4. For personal tax purposes, it also generally expected that the same rules and laws will largely continue to apply. The UK’s tax system is governed by domestic law and cross border taxation issues are dealt with by international treaties which operate independently of the UK’s relationship with the EU. The greatest impact is likely to be future changes resulting from the Government seeking to make the UK an attractive destination for human capital.

Key Details

Social Security and State Pensions- key considerations

Whilst there is no immediate change to the European social security regulations (EC No. 883/2004 and 1408/71), they would cease to directly apply once the UK formally leaves the EU.  For those within the scope of the regulations, this could affect which social security system applies to them, both in terms of where contributions are payable and where they derive entitlement to state benefits.

The Briefing Paper confirms that the purpose of the current framework is to ensure that people who choose to exercise the right of freedom of movement are not at a disadvantage and explains the current system for coordinating entitlements. 

The Paper sets out the possibilities that the UK could seek in place of existing co-ordination rules:

  • Negotiate bilateral reciprocal social security agreements with individual EEA Member States.  The UK already has a number of such agreements however some were concluded over 50 years and in the absence of re-negotiation could present challenges in their operation, due to restrictions on persons covered, for example.
  • Negotiate a single agreement with the EU/EEA as a whole.  This could be similar to the arrangements currently in place that allow Switzerland and the EEA countries to apply the EU rules. Whilst this would be simpler than individual bilateral social security agreements, the Paper recognizes that “such an agreement might end up closely resembling the existing EU/EEA social security co-ordination rules”.

Regarding the negotiation, the Paper also includes a response made to a Parliamentary Question:

  • The reciprocal entitlements that will apply following the UK’s exit are subject to the wider negotiation of our future relationship with the EU. We will approach the negotiations with the full intention of securing a deal that delivers the best possible outcome for the UK and its nationals.

Whilst the Paper sets out recent thinking on Brexit and State Pensions only, the Regulations in question cover social security co-ordination more broadly. It is worth employers noting that in the absence of renegotiated terms there could be dual social security liabilities increasing cost and at the same time, potentially creating additional compliance obligations for the employer. In addition we could see those working in another country covered by the EU Regulations as having restricted access to state healthcare compared to the current position.

In the short term, the UK’s participation in both EU social security regulations will continue and companies should continue to apply for certificates of coverage (A1/E101s) as normal.

Employment law – key considerations

The Great Repeal Bill will annul the European Communities Act 1972, the instrument currently used to give effect to EU law in the UK. After this repeal has taken place and before the UK formally leaves the EU, the same rules and laws will continue to apply as they had previously, ensuring continuity for employers and their workers. Once the UK formally leaves the EU, it will be open to the UK Government to reform, amend, or potentially repeal, a substantial number of legislative provisions relating to employment law which derive from EU legislation.

The UK Government has confirmed that it will ensure the protections and standards that currently benefit workers by virtue of the UK’s membership of the EU will continue to remain, as well as committing to enhance existing worker’s rights post Brexit. This protectionist stance can be seen in the way EU legislation is enhanced when transposed into UK domestic law, such as the entitlement for women in the UK to enjoy 52 weeks of maternity pay against the 14 weeks offered under EU law, as well as the additional flexibility afforded to parents relating to their shared parental leave entitlement. This worker-centered approach appears to be gathering pace, with the introduction of the National Living Wage in April 2016 and the appointment of a statutory Director of Labour Market Enforcement and Exploitation, tackling employers who do not pay their workers this wage. In addition to this, the UK Government has publicly stated that it wants the economy to work for all members of society; to this end a Green Paper on corporate governance was launched in November 2016. This paper seeks views on how to change and update corporate governance in three main areas:

  • Shareholder influence on executive pay.
  • The connection between the board and the workforce (as well as other parties interested in corporate performance).
  • What, if any, lessons can be learned from the governance of publicly listed companies and shared with or imposed upon other corporate entities.

The UK’s approach is not dissimilar to the approach of Germany and France, indicating that the UK’s approach post Brexit could continue to reflect EU Member States’ approach to employment law.

The UK Government has repeatedly underlined its commitment to ensuring continuity for both organizations and workers post Brexit; however there remain a number of key employment law areas that could be reviewed, such as discrimination legislation, TUPE, holiday entitlement, agency workers, collective consultation and case law.

Protection against discrimination in the workplace is relatively well-established, and due to this, it is likely that discrimination legislation is likely to remain in force in the UK post Brexit.

TUPE seeks to safeguard employee rights on a business transfer. The UK’s legislation is often referred to as “gold plating” the EU’s Acquired Rights Directive (ARD), as it goes beyond what the ARD prescribes. It has also been in place since 1981 and so is well recognized and accepted by employers and employees. It is therefore unlikely to be repealed, though there may be appetite for review of the restrictions imposed on the harmonization of terms and conditions post-transfer.

The EU’s Working Time Directive (WTD) allows employees to receive a minimum of 20 days’ paid leave per year. The UK’s Working Time Regulations (which implement the WTD) go further, giving employees 28 days’ paid annual leave. Recent rulings from the Court of Justice of the European Union (CJEU) have widened this entitlement, enabling employees to accrue holiday whilst on long-term sick leave and calculating holiday pay on the basis of wider remuneration, rather than basic salary. Whilst an erosion of basic holiday entitlement may be protected, the future of the CJEU rulings remain uncertain.

Agency workers Regulations (AWR) was introduced in 2010 and has been subject to much criticism for being overly complex and unpopular with businesses; this may be an area where there is scope for amendment, given its relative infancy and unfavored status. This will need to be balanced against the AWR’s increasing popularity with trade unions, due to it placing unionized workers on equal footing with permanent staff, thus change will not be without resistance.

Due to relatively little interest, collective consultation rights may be amended. However, given the low level obligations placed on UK businesses, the reduction of collective redundancy consultation requirements taking place in 2014 and potential trade union opposition to further change, this may not be a legislative priority.

Whilst it is arguable that there may not be appetite for amendment to UK employment law post-Brexit, the UK courts will no longer be bound by the decisions of the CJEU. This could arguably cause the greatest impact in the UK, and could result in UK case law moving away from the jurisprudence of the CJEU (even if judgment relates to legislation adopted by the UK post-Brexit).

Personal tax – key considerations

The UK tax system is primarily governed by domestic law, while cross border taxation is dealt with by double tax treaties which operate on a country by country basis independent of the EU. As such, the impact of Brexit on the UK tax system will be limited to a small number of areas affected by EU freedom of movement principles.

The main areas this affects are:

  • Personal allowances. Presently the UK grants personal allowances to non-resident UK nationals and is obliged to do the same for EU nationals. It is likely, following Brexit, that the UK may treat EU nationals like any other non-UK national and only allow a personal allowance for non-UK residents if provided for in a double tax agreement.
  • Pension contributions. The UK allows tax relief on contributions to non-UK pensions only in very strictly defined circumstances. In theory the free movement of people principles contained within EU law should allow relief for contributions to non-UK EU pension schemes even if they do not meet these strict requirements.  In practice relief is rarely claimed under these free movement principles but there would be no opportunity where the UK to be outside the EU.
  • Charitable contributions. The UK allows relief for contributions to UK and EU registered charities. It is expected that this will only be allowed for UK registered charities post Brexit.

Aside from these areas, leaving the EU may impact the setting of the UK’s tax policy, as the Government may change the taxation of mobile human capital to increase the attractiveness of the UK as a place to locate business.

Next steps

Whilst we await further clarity regarding the Brexit negotiations as they affect these areas, it is worth employers considering now what the potential changes could be for both internationally mobile workforces and local employees, in terms of compliance, policies and communications. EY will publish further analysis on the social security, taxation and employment changes as they occur. 

EYG no. 00744-173Gbl

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