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HMRC internal manual

Employment Income Manual

Termination payments and benefits: Section 401 ITEPA 2003: payments to meet legal costs

Section 413A ITEPA 2003

Termination of an employment may involve legal dispute between employee and employer. This may be settled by negotiation between the parties or by Court proceedings. In either event, the employer may agree to pay legal costs incurred by the employee.

Such a payment is within Section 401 ITEPA 2003 since it is made in connection with the termination (see EIM13010) but is not charged:

  • where the dispute is settled without recourse to the Courts if three conditions are met:

    • the payment is made direct to the employee’s solicitor rather than to the employee himself or herself and
    • the payment is applied to discharge the bill for solicitor’s costs that the employee has incurred only in connection with the termination of the employment and
    • the payment is made under a specific term in the agreement that settles the dispute
  • where the payment of costs by the employer is made in accordance with a Court Order. This applies even if the payment is made direct to the employee.

Note that the concession:

  • applies only to legal costs, not to any other professional costs (such as accountancy fees). However, it does include the expenses of expert professional witnesses incurred by the employee’s legal advisor.
  • does not allow an employee to claim a deduction for his or her own legal costs in any way.