Tax relief: employee liabilities and indemnity insurance
Published 5 December 2016
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Who is likely to be affected
Employees (or former employees) with costs funded by their employer for legal advice or indemnity insurance covering matters relating to their employment.
General description of the measure
This measure ensures that employees (or former employees) who may require legal advice or indemnity insurance which is funded by their employer, for example, in preparation for an appearance before a public enquiry, will not be taxed on the benefit provided whether or not any allegation is made.
Policy objective
Currently, when an employer funds legal support or pays a premium for legal indemnity insurance for their employees to cover costs connected with proceedings related to their employment, it is only tax-free for employees who have had allegations made against them in their capacity as an employee. There is no equivalent deduction or relief in relation to proceedings where no allegation is made against the employee, for example, where an employee is asked to give evidence before, say, a public hearing when they might also require legal support and advice.
The measure makes the rules fairer and introduces legislation which will allow employees called to give evidence to receive legal support funded by their employer tax-free, even if no allegation has been made against them.
Background to the measure
The legal advice tax exemption is currently legislated for, in the Income Tax (Earnings and Pensions) Act (ITEPA) 2003. This measure has not previously been announced as it is a wholly relieving provision.
Detailed proposal
Operative date
The measure will have effect on and after 6 April 2017.
Current law
The legislation setting out the tax exemption where an employer funds their employee’s legal or other costs is found at sections 346 to 350, 409, 410 and 555 to 564 of ITEPA 2003.
Proposed revisions
Legislation will be introduced in Finance Bill 2017 to extend the scope of the existing provisions in ITEPA 2003 so that deductions or relief are available for expenses incurred where an employee:
- gives evidence about a matter related to his employment in his capacity as an employee or where he acted in the performance of the duties of the employment
- is under general investigation about a matter related to his employment to determine whether or not there has been wrong doing
In addition, the government is amending the legislation to ensure that individuals subject to a termination settlement are treated in the same way for legal costs relating to their employment as any other employee or former employee.
Summary of impacts
Exchequer impact (£m)
| 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 |
|---|---|---|---|---|---|
| - | negligible | negligible | negligible | negligible | negligible |
This measure is expected to have a negligible impact on the Exchequer.
Economic impact
This measure is not expected to have any significant economic impacts.
Impact on individuals, households and families
There will be a positive impact on those individuals in the circumstances covered by this measure. This measure is not expected to have any significant wider impact on individuals, and is expected to have no impact on households and families.
Equalities impacts
This measure is a wholly relieving provision which applies equally to all sectors of the working population and complies with Section149 of Equality Act 2010 (and relevant Northern Ireland legislation).
Impact on business including civil society organisations
This measure is expected to have a negligible impact on businesses and civil society organisations. Affected businesses will incur one-off costs of familiarisation with the new rules. On-going costs include ensuring that reimbursement of legal costs to employees in connection with proceedings relating to employment is paid tax free.
Operational impact (£m) (HM Revenue and Customs (HMRC) or other)
This measure will have no operational impact on HMRC.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be kept under review through communication with affected taxpayer groups.
Further advice
If you have any questions about this change, please contact the Employment Income team on email: employmentincome.policy@hmrc.gsi.gov.uk.