In certain circumstances it is possible to get tax relief for legal costs incurred by an employee negotiating with a former employer over a termination package. If the employer pays the expense it would be a benefit in kind. HMRC will argue that the expense has not been wholly, exclusively and necessarily incurred for the purpose of the employment so is therefore taxable.
Some tax relief may be available on what used to be the extra statutory concession which is now legislated at Section 413A ITEPA 2003. If the former employer pays legal costs in accordance with a Court Order or a Tribunal decision, the costs are always tax free. However, if the dispute is settled out of court the costs are tax-free only if the payment is made:-
• Direct to the employee’s solicitor rather than to the employee himself or herself,
• To discharge the bill for the solicitor’s costs that the employee has incurred only in connection with the termination of the employment and
• Under a specific term in the compromise agreement which settles a dispute
This may be bizarre, but the tax free treatment applies only to amounts paid to a lawyer. There is no relief if the same payment is made to an accountant or tax adviser, or direct to the employee.
The tax relief does not extend to the payment of a lawyer’s disbursements and you cannot claim tax relief if you have to meet them out of a global settlement.
Our Advice:
On a case of this kind, instruct all advisers viayour lawyer;
• to ensure that recovery of costs is pursuant to a specific term in the compromise agreement
• Do not pay your lawyer and seek reimbursement; have the other side your lawyer direct and
• Finally, don’t try and understand the logic of the tax system
HMG Law: Solicitors of Oxford.
