The long-term outlook for UK employers after Brexit and COVID-19

British businesses have long struggled to find suitable talent domestically and, in many cases, have for much of the past 20 or more years seen the EU labour market, and the access that the UK has to this market because of its EU membership, as a valuable resource. However, with the UK’s access to unrestricted EU emigrant workers expected to end on 31 December when the EU / UK transition phase comes to an end, what steps should UK employers be taking with regards to their future talent needs?

Whilst the COVID-19 lockdown and the associated economic recession has potentially made ‘talent’ and the ‘search for talent’ less of an immediate issue for British businesses, those companies which are planning pro-actively for the future still need to consider their longer-term staffing requirements and the options and choices which are available for their particular business in this regard. Indeed, one could argue that the COVID-19 lockdown and the fact that many firms have successfully continued to operate on a virtual tele-working basis provides pro-active companies with some additional options from a longer-term staffing perspective compared to what may have been the case, without the lessons and experiences which arise from home working.

While there are still many uncertainties in respect of exactly what the UK’s longer-term relationship with the EU will look like, it is quite possible that in the case of a ‘no-deal’ in the coming months, traditional British businesses, e.g. those purely with a UK presence (office / legal entity), where staff travel overseas for business on an ‘as needs’ basis, could have significant difficulties with regard to their UK-resident workers undertaking duties overseas. For example:

While it is expected that UK-resident employees should be able to continue travelling to the EU for genuine business trips, the ‘effective costs’ associated with such trips may well increasebecause of a weakening in the value of Sterling, more expensive flights and / or simple additional delays at customs in the EU states. Though such costs may not be significant for many businesses where such international travel is quite limited, for more active international businesses, even a small increase in such issues could have a significant impact on staffing and costs.

Social security – While UK employees having limited duties oversees are usually protected from ‘double income tax liabilities’ (and even where they are subject to taxes in another jurisdiction, the UK would provide tax credit relief in the UK against the UK tax charge and thereby avoid any ‘double liability’ arising), the position from a social security perspective is less clear cut. In particular, where employees have not been working internationally across the EU prior to 31 December or where they subsequently have a clear role change after that date.

In either of these situations, companies (and their employees), could become liable to social security contributions in the other EU state and the same time as remaining liable to National Insurance Contributions (NIC) in the UK. Moreover, such costs would represent an absolute ‘double cost’ to the individuals and companies, as unlike the position with income taxes, there is no way of ‘mitigating’ the double charges that arise for social security/NIC purposes (that is, there is no equivalent of the tax credit relief which is available for tax purposes).

While the UK had (before the EU regulations were introduced), a number of Social Security Agreements with EU member states (albeit not all countries in the EU), HM Revenue & Customs (HMRC) believes these historical agreements are presently dormant and invalid, as they were superseded by the EU Social Security Regulations. Though it may be possible to ‘re-activate’ these old Social Security Agreements, outside a UK/Ireland Agreement (which will basically mirror the EU regulations on a country-by-country basis), HMRC have not announced any such agreements for the period from 1 January 2021 onwards.

Finding staff with the appropriate skills – e.g. language abilities. With the UK proposing to introduce visa / work permit requirements for EU Nationals coming to the UK for ongoing work from January 2021 onwards (though certain categories of employee may still be exempt from these requirements – e.g. seasonal farm workers), will you have employees with the appropriate skills and experiences to service your clients – particularly your clients in EU countries – on an ongoing basis?

It is often vital for UK companies to have fluent speakers of other languages amongst their staff – both when you are initially ‘selling’ your products to potential clients, but also from a longer-term support and training perspective. For example, a company selling high-end medical or technical machinery to businesses in Europe will typically need to ensure that the induction training provided in such cases, is provided in German, French, Spanish, etc. It simply won’t be acceptable to clients in such fields if their staff aren’t fully trained on the equipment in a language that they can safely / clearly / correctly understand.

Possible solutions

In practice, there aren’t any ‘easy’ or simple answers for businesses facing the above issues. Each business will need to make decisions based on their particular circumstances and needs. However, some options which companies may wish to consider include:

Do staff already travel to Europe on business as a core / regular part of their role?If so, can you make sure that they are all fully ‘up-to-date’ from a compliance perspective – e.g. by making sure that any A1 Social Security Certification is in place (and correctly dated) for their European duties. This can help minimise the risk of any double social security liability arising, for example, for the period from January 2021 onwards.

If you are planning to have staff work in Europe ‘in due course’ with assignments starting after 1 January 2021, would it be sensible to bring the start of agreements forward, so that the employee(s) concerned have already started in the UK before the end of the Withdrawal Agreement (which offers employers and employees some useful ‘protections’)?

Do you need UK-based staff? Or should you actually be looking at recruiting staff in other EU jurisdictions directly?The COVID-19 lockdown has shown, for example, that people can work effectively (in many cases) outside of a fixed, traditional office environment. By recruiting new staff in other EU countries, companies may find that:

they are able to obtain the appropriately skilled staff more cheaply than they could in the UK
they are in a position to benefit from the (potential) business networks that such staff may have already established in the other locations.

If you are looking to recruit staff in other EU states directly per point 3 above, could it be appropriate to establish some type of formal presence in the EU (at least in a few states), to help provide you with a base for employing people and for providing services in particular jurisdictions?

Whilst it would normally be possible to employ people in EU countries directly from a UK entity (i.e. without any formal presence in the EU), companies may find that having a formal presence (whether just an office or a separate legal subsidiary) may make your business more attractive to potential EU-based employees.

Potential next steps

In practice, as with most things in business, finding the right talent and knowing where it should be located is a ‘judgement call’ – more of an art than a clear science in many respects. In addition, whilst the staffing and employment angle is important (and the clear focus of this article), it would also be important for companies to consider a range of related issues when considering their next steps in this regard. These include:

What corporate obligations would arise in the overseas jurisdictions including corporate obligations (e.g. corporate tax, VAT, social security and tax withholding registrations and legal / administrative obligations)
What additional costs will arise – both from a direct labour perspective (e.g. with regard to employer social security), but also from a wider administrative perspective (e.g. in terms of legal and corporate obligations.

However, as mentioned in the article, whilst there are no clear / simple answers for British businesses, and companies may wish to delay making any final decisions for the time being – both whilst COVID-19 and the exact nature of the longer-term UK / EU relationship are (hopefully) resolved – we would strongly recommend that British businesses start to consider their options and potential ideas in this regard, so that they are at least partly prepared for any next steps that they need to take to remain effective from an EU perspective.

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This article is taken from the latest edition of our Brexit Insights newsletter, our summary of Brexit updates designed to ensure you have a better understanding of how the UK leaving the EU may affect you as a private individual, a business, or both. If you would like to receive future editions of this publication, please register on our insights page here.

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For more information, please contact Robert Salter.