Brexit: the implications for global payroll
The UK’s referendum vote to leave the European Union is certain to have very many consequences for global payroll functions, many of which are difficult to understand right now. Read this article to better understand how your business may be affected.
How this article will help
In this article, published as the cover story in July 2016’s Global Payroll Magazine, the aim is to give you a brief overview of some of the key Brexit issues that will directly affect global payroll functions, why they are important and how you can address them. It will also explore more about how likely such changes are and when they might take place.
Changing bases within Europe
Many multinationals from outside the EU have chosen the UK as their European base from which to access the EU’s Single Market. When the UK leaves the EU, it is highly possible, though not definite, that the UK may lose access to all or part of the Single Market.
As a result, some multinationals may now start considering whether other European countries should act as their base instead. This means that global payroll managers may be asked to help in transferring staff from the UK to other EU countries.
For those multinationals who already have entities elsewhere in the EU, this should be relatively straightforward. Global payroll managers should be able to transfer staff from one existing payroll in the UK to another payroll that already exists in their chosen alternative EU countries.
But they may also be required to transfer employees to alternative European countries where operations do not already exist. In this instance, setting up a new payroll overseas should again be relatively straightforward under their existing global payroll contract. However there is an additional requirement in this situation, namely the potential need to create legal entities in a new country and deal with the other accounting and tax compliance that may arise as a result.
Every European country has its own procedures for creating legal entities and its own corporate income tax regime as this area has not been standardised within the EU. So global payroll managers may need to find solutions for these requirements on a country-by-country basis outside of their global payroll contract. Our plain-speaking Guide on Getting Started in a New Country will tell you all the key items you need to consider.
Visas and Work Permits
The Brexit vote may also have global payroll implications for companies with continuing operations in the UK, many of which hire employees from other countries within the EU. These employees benefit from the right to free movement of labour within the EU as the Single Market allows EU nationals to work in other EU countries.
But once the UK leaves the EU, it is possible that non-UK employees who are EU nationals will need to apply for work visas and permits to continue working in the country. They could, in fact, be subject to the same rules that now apply to non-EU nationals. These rules require employees to sponsor foreign nationals, which adds a significant amount of cost and management overhead to the whole process. Also these rules can make it impossible for lower paid employees to work in the UK.
This issue may have a significant impact on global payroll managers. If your firm has not previously sponsored overseas nationals in the UK, you may need significant training and help to deal with these considerations. Also bear in mind that Brexit could make it more difficult for UK nationals to work in the EU.
As part of its membership of the EU, the UK currently benefits from harmonised payment processing rules across Europe (known as SEPA). These rules make it easier for global payroll managers to pay salaries, tax and social security contributions from a UK bank account to locations across the EU.
But after the UK leaves the EU, it may become more difficult for companies to make European payments from a UK bank account. The current scenario has allowed employers to standardize payroll-related payments over recent years so any change would obviously have an impact on global payroll functions. For example, it might be necessary for global payroll managers to work with their Treasury colleagues in order to source bank accounts in other EU countries.
It is worth noting however, that opening bank accounts in new countries can be a slow process due to onerous compliance requirements. Timetables vary widely across European countries and in some places it can be difficult to find banks who accept foreign-owned accounts. As a result, you should allow 3-4 months to open an account overseas, which means starting to plan early.
As a member of the EU, the UK abides by all current EU Data Protection laws. But once it leaves the EU, it will have to introduce its own data privacy legislation. This means that any global payroll manager who stores data about EU citizens and operations in the UK will need to review their data protection arrangements carefully.
The EU’s laws on Data Protection will tighten significantly in 2018 under legislation known as the GDPR). As one example, GDPR will significantly increase the rights of individuals. Therefore, if you hold global payroll data in the UK about EU nationals, it is possible that your organisation may have to adopt compatible standards to the new EU rules.
Are these changes certain to happen?
In a word, no. All the changes mentioned above are possible but by no means certain. The full implications of the UK leaving the EU are still very unclear. For example, no one yet knows what access, if any, the country will have to the EU’s Single Market. The detailed implications of the move will only become clear once a deal between the two parties is agreed.
How long will this take?
It may take a long time for the details of any deal between the UK and the EU to become clear. As I write, the UK could still be in the UK for over 2 years until late 2018. This is because the UK has to formally notify the EU that it plans to leave, which triggers the now-famous Article 50. Article 50 sets out how countries should leave the EU and includes a drop-dead date of two years from the time it is triggered to the end of negotiations
But because no country has ever left the EU before, it is highly uncertain how long such a process would take in practice. It is also unclear at the time of writing exactly when the UK plans to trigger Article 50. All that is sure is that businesses and global payroll managers will need to cope with this uncertainty for some time to come.