The Warwickshire Dylan

The village idiot is sat on his bench watching the traffic go by the duck pond when a rather super car glides up next to him.  The window slides down and out pops a chappie’s head.

“I say, Dylan, do you know the way to Stratford?”

The village idiot paused, thought.  And then thought some more before he replied.

“I wouldn’t start from here if I were you.”

Now that may not be the most amusing anecdote, but it describes a position I encounter frequently when dealing with enquiries, whether from clients or those initiated by HMRC.  They tend to come in front of me starting with an assertion.  And when I check, quite frequently the enquiry has started from that assertion, and I wouldn’t start from there.

There are differences.  As a rule, clients tend to be content to accept that it is an assertion, go back to the real start of their journey and then explore the trip based on the facts.  After all, unless there is user error, a Satnav doesn’t start your journey miles from where you are (although mine does sometimes change its mind mid trip and try to take me somewhere else!).

With HMRC it tends to be difficult to get them to move away from their assertion, no matter how far from the real starting point it begins.  Sometimes this is not their fault.  The taxpayer may have started with an assertion and then not addressed the full facts.  It is still, however, difficult to get the idea out of the taxman’s head.  Sometimes they start their enquiry though with that assertion sitting in their head.  They may not admit that, would be horrified that I think that, but they do.  And once again I don’t blame them and can even empathise – my twelve years in Customs & Excise is a long time ago now, but I remember how we were trained; “they’re all at it, you’ve just got to find out how”.

My job, from a telephone enquiry, right through to a Tribunal tends to have three elements.  Establishing the facts.  Applying the law.  And then providing or arguing an opinion.

The first and the most important is establishing the facts.  You cannot seek to apply the law without full knowledge of the facts – and that applies equally to clients and taxmen.

Frequently this is not an easy task and it is not unusual for important facts to be omitted.  My clients’ typical comment is that “Oh, I didn’t think that was important”.  But sometimes it is more sinister.  For example, on a recent Alternative Dispute Resolution (“ADR”) case, it came out at the meeting that HMRC had withheld evidence from the taxpayer and us.  Indeed, this case is in Tribunal, and had diverted into ADR to clear the ground, and this evidence was not available to the Tribunal either.

So, there is a world of difference between instances of difficulty establishing the facts going from ignorance right through to withholding of evidence.  Which is why I spend a lot of time dealing with assertions.

Which reminds me….

The village idiot is sat there after a few pints at the pub over the duck pond when another rather super car glides to a stop and another chappie’s window slides down.

“I say, Dylan, can you tell me the way to Stratford?”
Dylan pauses, pauses a bit more and asks, “How do you know my name is Dylan?”
“Oh” said the chappie “I guessed”.
“Good” said Dylan “Guess the way to Stratford”

Steve Botham
Warwickshire

Brexit – What about the people? All about social security (NIC)

Following her first article about Brexit and its effect on personal income tax, here is Melissa Dunkley’s second article in the series which looks at social security (what we call NIC in the UK). 

Melissa’s company, MD Advisory Limited, is a specialist tax adviser, dealing with the tax and social security position for expatriates.  She advises on both UK nationals going overseas and foreign nationals coming into the UK.  Email her at: melissa@mdadvisory.co.uk

In the first article of the series we looked at personal income tax for UK nationals working in the EU and EU nationals working in the UK, and concluded that Brexit would not change much. So now let’s look at social security (what we call NIC in the UK).  Will that be affected?  OMG, yes!

I’m not going to focus on the availability of maternity pay or job seeking in another EU country. These are articles focused on workers and their employers. There are a lot of them out there who are correctly paying into the relevant tax and social security systems and they didn’t get much of a mention during the referendum or since.

For employers, social security is simply a cost. They have to contribute the employer’s percentage and get nothing for it except a corporate tax deduction. For employees, social security typically equates to little more than entitlement to a state pension. Let’s set the record straight on one thing before we go any further, entitlement to use the NHS does not come from paying NIC. The NHS is funded for the most part by the tax system and you are entitled to use it if you reside in the UK.

So, if you are a UK national going to work in the EU or an EU national coming to work in the UK, do you pay NIC or the other country’s equivalent? What does it do to your state pension?

The answer is you follow the rules in the social security agreement that exists for members of the EU (and EEA countries and Switzerland). Put simply, that agreement says that you pay in only one country at any given time and it should be the country in which you work, unless it’s a short time secondment (up to five years), then you can apply to stay in your home country’s system.  If you are working in multiple EU countries at the same time, there’s a set of rules to say which is the one and only country in which you pay.  The employer always pays in the same country as the employee.

Once Brexit happens, the UK is no longer in the EU and is no longer party to this agreement. Therefore, unless some special agreement is reached during the Brexit negotiations, one of two options will happen.
Before the UK joined the EU, there were individual social security agreements between the UK and some EU countries, France and Germany for example.  We could revert back to these but these haven’t been updated since before the UK joined the EU, so they’re in need of some work.  Besides which, has anyone still got a copy?  Remember also that at the time the UK went into the EU, a country called Yugoslavia existed, so there are a lot of EU members with whom no old social security agreement exists because they didn’t exist back then.

The other option is that we simply operate the rules that exist for nationals that come from other countries, with which the UK does not have a social security agreement, and there are many of those. In this scenario a UK national going on secondment to another EU country would most likely continue to have to pay NIC for the first year. They would also be liable to pay in the other country according to that country’s own rules. So that’s double “taxation” and there’s nothing you can do about it. If that EU country is France, that’s 12% UK + 20% FR for the employee and 13.8% UK + 48% FR for the employer, give or take.  So, you might get a pension in the future but you’ve got nothing to live on today.

And what about the state pension?  Most countries have a system whereby you have to contribute for a minimum number of years to get any pension at all.  In the UK the minimum is currently 10 years. Without the rules contained in the EU social security agreement, if you worked and paid in for 40 years but in five different EU countries, you would not get a state pension from any of them unless you reached each country’s minimum number of years.  However, the EU social security agreement contains provisions whereby you consider the contribution period across all member countries, i.e. 40 years, so that you qualify.  You then get effectively a proportion of the full pension from each country in which you’ve paid.
The other important point about pensions is inflation protection.  A UK resident receiving a UK state pension has their pension amount increased each year in line with whichever inflationary measure the government adopts.  Due to the non-discriminatory rules of the EU, an EU or UK pensioner living in the EU also gets the same inflationary increases each year.  However, a pensioner living in any other country does not.

If you retired today on the new basic pension of £159.55 a week, you would get the same £159.55 a week for the rest of your days.  If you don’t think £159.55 will buy you much today, imagine how much it won’t buy you in 20 or 30 years.

So, in summary, will leaving the EU have any effect on NIC?  Most definitely, yes.  Have we had any information yet about what might happen post departure? No.

My crystal balls are useless

I collect glass balls – paperweights mainly.  Some are crystal, but they are totally ineffective when it comes to looking into the future.  Especially so when I am asked by clients trading internationally where the UK is headed with Brexit.
March 2019 is not a long way away and in business planning terms 2021 is pretty close too.  If you were planning to build a factory to service the European market you’d like some idea as to where best place it.  And I now know that the UK is not necessarily ruled out by the prospect of Brexit, but that it is an important factor.

Part of my problem with Brexit is that the politicians keep blowing with the wind and stabbing each other in the back – on both sides of the English Channel.  In the UK, we don’t know at all what the Government’s Brexit will look like or when it will really be implemented.  And whilst I have had complaints about the political nature of some of my articles, politics is at the heart of this issue and taxation is never divisible from politics.  VAT in the UK was a consequence of the British political decision to join the European Community, as we then called it.  Even more appropriately, looking back, it was introduced on April Fool’s Day 1973. Hence some political awareness is necessary to try to divine what might happen.

Right now, the UK has asked the EU for a two-year implementation period, although nobody has told us what is to be implemented.  Of course, the EU could just say “no”, except we know the western Europe’s states have similar problems to the UK in that, for example, they do not have a Customs infrastructure to cope with Brexit at March 2019. The French for example are relying on a new Customs computer system, which the UK will use too, being delivered on time (work on it started way before the referendum but not in anticipation of the result). Somehow the French must recruit, train and house about 5000 extra customs staff, as we do. And then a similar number of customs agents will need to be recruited and traditionally they have come from National Customs services. So, it is going to be very hard for all states with an active border with the UK.

The UK has also suggested to the EU we stay in the Customs Union and the Single Market until Spring 2021 i.e. no change until 2021.  Provided that the remaining EU member states agree this proposal.
My best guess is that is exactly what will happen until 2021. The EU has as much chance of being ready by 2019 as does the UK. We could all be silly and wreck trade between the UK and the rest of the EU, but that would do as much economic damage to France, Germany and Holland as would be inflicted on the UK. In my opinion, the EU budget could not stand that, leaving the remaining member states in crisis.

After that is more difficult because politically the current UK Government must take the UK out of the Single Market and the Customs Union at that stage. It must abandon other trade structures such as EFTA and EEA because it has managed to mix them up in the public’s eye as being the EU. But it now knows the UK would be in a trade wilderness if we did that. And the UK could have had at least one change of Government along the way.

We have heard the UK politicians telling us that what will come will be different but have the same benefits. I think the EU politicians know what this means too.

I think the UK will seek to create a free trade area including the EU and countries like Norway, Switzerland and Iceland. It won’t be called the EEA because that is politically bad, it will be “new” but the same. I think that the Customs barrier will sit outside this new free trade area just as it does now. I can also see that within the new free trade area we will find harmonised indirect taxes which look remarkably like those of the Single Market, but it will be new and the UK will have a big say, just like it does now, but it will be different and better because it is not called the Single Market.

I think this brand new and much better body will negotiate trade deals with third countries just as the European Union does now, but it will be better allowing the UK to trade freely with the rest of the world, just as it does now (check out the tables published by the BBC recently).

I think this new world will take at least seven years to be agreed between the parties. In the meantime, the UK will blame the EU for terrible delays, the EU will blame the UK for not doing its homework and they will all agree to extend the implementation period which is not a transitional period.

So, nothing will change for seven years, but then it will be different but the same.

Of course, these new bodies will have to have their administrations somewhere else, possibly Madrid because the weather is so much better there.
And sadly I am not joking. The EU does not want the UK out and that body understands the art of compromise and finding solutions. Within seven years the UK may have once again found that art.

In the meantime, I suggest you read Machiavelli (the machinations), Nineteen Eighty-Four (the art of Newspeak and “Oceania”) and 1066 and All That (for the logic), and you’ll be as enlightened as any Government minister as to what is really happening.

You may gather that I am very cynical. I also do not believe I will be far off the mark.  But bear in mind that my crystal balls are useless.