Brexit – Tax and social security implications

The main challenge with trying to predict anything about the consequences of the UK’s exit from the EU (now universally known as Brexit) is we simply do not know what kind of agreement the UK will have with the remaining EU members post-Brexit. Nevertheless it is possible to make some educated guesses given what we already know. Here, I will be considering the tax and social security implications of Brexit, in particular for UK expats in France or those owning second homes in France.

What is not likely to change

The first two years

Prime Minister David Cameron has stated that if the UK votes to leave the EU, the government will not be entering further negotiations in order to remain; Article 50 of the EU Treaty would be invoked: The British government would notify the European Council of its intention to withdraw from the EU and negotiations would begin to come to an agreement on the UK’s future relationship with the remaining members. If an agreement is reached before two years, the UK will cease to be a member of the EU from the date agreed. If an agreement is not reached within two years then the UK would only continue to be a member of the EU if the UK and the other EU members agree unanimously to extend the two-year limit.

Commentators have stated that two years is a short time when it comes to agreeing trade agreements: the trade agreement between the EU and Canada began in 2009, concluded in 2014 and it may come into effect this year.

The UK could therefore cease to be a member of the EU within the next two years, but it should not come as a big surprise if it remains in the EU for several more years.

Taxes (except VAT)

Tax laws are generally determined by the individual member states and as long as they do not contravene the overriding EU principles such as freedom of movement of people and goods, they are not usually affected by the EU, with the notable exception of VAT (see below).

National tax laws can be overridden by double tax agreements. Both France and the UK have double tax agreements with many countries, including with each other covering income and capital gains tax. However these double tax agreements do not depend on EU membership.

We should not expect any real impact on income and capital gains tax as a direct result of Brexit. Other taxes which should not be affected as a direct result of Brexit include: inheritance tax, local property taxes (taxe d’habitation, taxe foncière) and stamp duty on property purchases.

VAT

VAT for EU members is essentially an EU tax. Although it is collected by the individual member states, the rules governing VAT are determined at EU level.

If the UK left the EU, we can assume it would no longer be bound by the EU VAT rules. Subject to whatever agreement is concluded upon exit, the goods and services provided by the UK to the remaining EU members would be classed as exports. This may mean UK exporters would have to pay import VAT when exporting to the EU. On the flip side UK tourists visiting the EU may be able to reclaim VAT they pay on goods purchased in the EU; although import VAT may be due in the UK if they bring those goods back to the UK.

For private individuals VAT is usually just a hidden cost of goods they purchase and they don’t have to worry about the associated paperwork. It is businesses that will bear the brunt of the potential VAT shake- up post Brexit.

Social security

Social security covers areas that are of importance to many people who will be affected by Brexit, such as access to health care and pensions. In my view, social security is the area where individuals are most likely to feel the effects of Brexit. Initially there will be uncertainty as individuals wait for what will replace the current system, followed by possible upheaval depending on what agreement is reached between UK and the remaining EU members.

We have heard that the UK may remain in the European Economic Area (EEA) like Norway, Iceland and Liechtenstein. If that is the case, it is not likely we will see major changes because the EU social security legislation extends to EEA countries. My feeling is that joining the EEA will not meet the demands of the ‘Leave’ campaigners given that this solution does not really address some of their gripe with EU membership such as freedom of movement of people, access to social security benefits and contributing money to the EU.

We need to seriously consider that the UK’s social security relationship with the remaining EU members could resemble what is in place with other nations. Whilst I would not expect there to be visa requirements for holiday visits, we should prepare for the following scenarios:

  • Those currently working in France may have to apply for work permits in order to remain in France;
  • It may not be so easy to retire to France in future and current retirees may not be able to remain in France indefinitely – they may have to demonstrate that they can support themselves financially;
  • Restrictions to access to the French state health care system;
  • Under current EU rules, periods of work abroad in other EU countries are taken into account when determining eligibility for state pension – this may end.

The reality is that British people living in France will most likely face a period of uncertainty as regards their status and rights which they currently enjoy automatically by virtue of UK’s EU membership. In order to retain some of these rights, those who have been living in France long-term (over five years) and who wish to continue living in France may want to consider applying for permanent residence or French citizenship.

You might assume that UK National Insurance contributions are the equivalent of French social contributions but there are some fundamental differences. UK National Insurance contributions are very much a function of earnings, whether employed or self-employed. In France, they are much more widely applied which can come as a surprise to many; for example they are applied to pension income and investment income such as dividends and bank interest.

I will give an overview of the scope of French social contributions and describe briefly how you become liable for them.

French resident workers

First and foremost social contributions are generally due on any kind of work that you carry out in France. This falls into two main categories: employees and the self-employed.

Employees resident in France

Generally employees in France will pay social contributions on their remuneration (salary, bonuses, benefits in kind etc). Their employer will also have to pay employer contributions.

Examples of exceptions are:

  • Employees posted to France on a temporary basis from a country which has a social security agreement with France (this applies to EU countries which for the moment includes the UK), allowing them to continue paying social security contributions in their country of origin.
  • Cross-border workers who live in France but pay social security contributions in the country where they work (for example Belgium, Luxembourg and Switzerland).
  • Those employed in more than one country; EU social security regulations for example may mean that they pay social security in a country other than France even though they normally live in France.

There are various social contributions covering for example health, accident at work, maternity, unemployment, death/disability and retirement. The calculation is quite complex in that each insured item has its own percentage(s), salary bands and may also depend on the total number of employees in the firm. Typically employee contributions are 20% – 25% of gross salary and employer contributions are typically 40% – 45% of gross salary. Very high salaries will have a lower percentage because most of the contributions are capped.

Self-employed resident in France

Self-employed workers in France are subject to social security contributions on their profits. Some employees are deemed to be self-employed for these purposes for example majority shareholder directors of companies. Similar exceptions to employees may also apply: temporary workers in France, cross-border workers and those working in more than one country.

Again the calculation is complicated but is typically 45% of profits. The exact percentage will depend on the actual profit.

If certain conditions are met, you may be able to register as an auto-entrepreneur, which is much simpler to operate than the normal social security regime for the self-employed. In this case the social security contributions are calculated based on turnover rather than the profit (percentages for 2019: 12.8% for those trading goods and 22.% for others, mainly service providers).

French resident UK retirees – pensions

In possession of S1 document

Retired British people who have relocated to France will normally have an S1 document which entitles them to French state health cover. With the S1 document, any treatment that you do not pay for is covered by the UK. A consequence of this is that you also do not have to pay French social security contributions on your pension income.

No S1 document – private health insurance

Early retirees from the UK can no longer obtain the S1 document. If they choose to go for private health insurance then they are not subject to the French compulsory state health cover; they also should not have to pay French social security contributions on their pension income.

No S1 document – French state health cover

It is possible to continue working (as an employee or self-employed) after reaching retirement age or to apply for French state health cover if you are settled in France. In these circumstances you are subject to the French compulsory state health cover and your pension income will be subject to French social security contributions. The current rate is 7.4% (and a reduced rate of 4.3% for low incomes).

Investment income and gains

French residents

Once you are resident in France you will be subject to French social charges on your worldwide investment income and gains (such as bank interest, dividends, rental income, capital gain on sale of investments and property). The current total rate of these social charges is 17.2%. This is in addition to French income tax that may be due.

Non-French residents

If you are not resident in France you will still be subject to social charges on your French rental income and capital gains from French real estate property. You may be aware of the EU court ruling in 2015 that the French government could not apply social charges as widely as it thought. From 2018, the social charges for property income and gains are now applied as follows:

  • 7.5% for those who pay their social security / national insurance contributions in another EU country.
  • 17.2% for the rest

Effect of Brexit

Whilst the UK remains in the EU, it is subject to the EU social security regulations. This means for example that the S1 document mentioned above has effect for social security cover in France. What will happen in future depends on the post-Brexit arrangements which are to be agreed between UK and the remaining EU members.

This was an overview of French social security contributions; the detailed rules can be quite complex. If you would like clarity as regards your own situation and to avoid becoming liable for penalties in respect of none payment, do ensure your take professional advice relevant to your own circumstances.