Tax break on employee costs in legal cases

HMRC has published draft guidance on changes to tax rules where an employer funds costs or pays for legal indemnity insurance for employees for proceedings related to their employment, with the aim of making them simpler to operate

Legislative changes due to be introduced in Finance Bill 2017 will extend the scope of Section 346 Income Taxes (Earnings and Pensions) Act (ITEPA) 2003, effective from the 2017/18 tax year.

This currently gives directors and employees deductions against the earnings of an office or employment for amounts and connected expenses paid in respect of their liabilities related to their employment, which includes costs incurred in connection with any claim they are subject to, and insurance premium payments.

The new proposed measure will mean a deduction is also available against earnings where an employee incurs costs or expenses in connection with giving evidence in or for the purposes of proceedings (or some other process or an investigation) about a matter related to their employment. The relief applies even if no other action is likely to be taken against the employee as a result of the proceedings.

‘Giving evidence’ includes answering questions and making a statement either formally or informally.

‘Proceeding or other process’ includes civil, criminal, disciplinary or arbitration proceedings and any process for resolving disputes or adjudicating complaints, and the exemption includes costs or expenses relating to any proceedings or investigations likely to take place.

The guidance gives the example that if an employee gives evidence before a public inquiry about matters relating to their employment, even though an allegation has not been made against them, they are entitled to a deduction against their earnings for any expenses incurred for obtaining legal support.

Additionally, the guidance notes that the rules in Section 346 ITEPA 2003 in relation to qualifying insurance contracts have been amended with effect from 6 April 2017, as a result of the move to include additional liabilities and expenses for which a deduction is available.

The effect of the first exclusion is to exclude from relief premiums for mixed policies; that is, policies that cover both qualifying and other liabilities. HMRC says if such policies were not excluded it would be necessary to apportion premiums between cover that was qualifying and other cover, and such apportionment could be very complex.

The purpose of the exclusions is also to keep the operation of the relief relatively simple by excluding policies that go significantly beyond the provisions of annual cover against qualifying liabilities and costs and expenses associated with them.

In addition, the guidance explains that from 6 April 2017, the scope of the relief for payments or benefits made in respect of liabilities relating to a legal action is expanded to include amounts paid by or on behalf of the individual by the employer, former employer or personal representatives.

The guidance will be finalised and published following Royal Assent of Finance Bill 2017.

Guidance: Simplification of exemptions for employee liabilities and indemnity insurance is here.

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