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HMRC internal manual

Employment Income Manual

Deductions: directors' and officers' liabilities: general

Sections 346 to 350 ITEPA 2003

Company directors and officers (and, to a lesser extent, employees) may be subject tolegal action undertaken by their employers or by third parties in respect of alleged oractual wrongful acts or omissions in their capacities as directors or employees. Insurance(usually called indemnity insurance) to cover damages and legal expenses arising from suchclaims is available but it cannot extend to fines or penalties for criminal acts.

Where an employer meets the liability for a director or employee arising out of such anaction the employer’s payment will normally be chargeable on the director or employee asearnings arising from the employment (see EIM00580 onwards).Similarly, where an employer arranges and pays for insurance to cover potentialliabilities arising to directors or employees from alleged or actual wrongful acts oromissions in their capacities as such, charges under Chapter 10 of the benefits code (see EIM20007) arise in respect of the benefit of the insurance cover(see EIM21001 onwards). The measure of the charge is theproper proportion’ (see EIM21200) of the premium: that is,that proportion of the overall premium that is attributable to the cover provided for thatdirector or employee.

Where a former employer meets a liability after the directorship or employment has ceasedthe amount may be also be chargeable as employment income.

In some circumstances relief is due against these charges, see EIM30505.