Until recently, contractors have always been advised to simply use their UK limited company to invoice a client in another EU country without worrying about local social security contributions. Now, contractors are told they need to apply for an A1 certificate in their home country and submit it in the country of work.
Why this sudden change of heart?
EU regulations for social security have not changed and A1 certificates have always been required. However, this policy was not always enforced.
While European nationals have the right to work freely inside the EU, Switzerland and EEA countries, some obligations are still attached to it. Working internationally can provide exciting opportunities for contractors and enable them to earn more in both monetary and cultural terms. There are, however, a number of risks and tax liabilities for contractors who fail to observe the rules and regulations governing international contracting.
What are the risks involved?
There are two main risk categories:
- Financial risk: the authorities might impose a more or less substantial fine to any or all parties involved.
- Reputational risk: a company that is seen as facilitating non-compliant behaviour might lose important clients and therefore sources of revenue for many years, if not forever.
While a fine can always be recouped through new income, reputational damage poses a more long-term and potentially irrecoverable risk to a company. Reckless attitudes encouraged by contract management companies can drag down clients, agencies and contractors alike, and they are seldom forgiven or forgotten in business.
What are the important rules to obey?
In general, employees should pay social security contributions in the country where they work. Employees from an EEA country working in another EEA country may continue paying social security contributions in their home country (and will be exempt from paying dues in the other countries) if they obtain an A1 certificate from the home country. To qualify, the expected period of work abroad should be no more than 24 months; or they usually work in two or more EEA countries (multi-state workers). As a general rule, they must have worked for at least three months before leaving for the new country to obtain an A1 certificate.
For self-employed professionals, rules are similar to those for employees. They can apply for an A1 certificate, subject to certain conditions, that will exempt them from having to pay social security in the work country. In case an A1 cannot be obtained, the only alternative is to pay into the social security system of the work country. Not doing so is fraudulent and dangerous.
Personal Services Company (PSC)
For people contracting abroad using their own PSC, things are even more complicated, as everything depends on the country of work; this means that it might or might not be advisable to use their UK ltd (or any European ltd company for that matter) to work in another country.
In any case, the company must be localised. In other words, it must be declared to the local authorities, and the contractor must receive a local salary from their limited company, pay local taxes on that salary, and social security contributions are made locally or back home, if they have an A1 certificate.
Navigating the complex world of A1 certificates and cross-border tax obligations might seem overwhelming and even deter a new contractor who is considering a contract abroad, but Access Financial is here to serve and help.
Call one of our offices today for a free chat to assess your circumstances, and we will advise you on the best available solution based on your personal circumstances..
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