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HMRC internal manual

Employment Income Manual

Deductions: directors’ and officers’ liabilities: qualifying liabilities

Section 348 ITEPA 2003 A qualifying liability in relation to an office or employment is a liability imposed:

  • in respect of acts or omissions of a person in his capacity as holder of that office or employment or in any capacity in which he or she acts as holder, or
  • in connection with any proceedings in respect of a claim arising from such acts or omissions.For this purpose a liability is imposed even if it arises from an out of court settlement. The central issue is whether the claim was such that, if pursued, it would, on the balance of probabilities, be decided, at least in part, in the claimant’s favour. Similarly, a liability for legal costs is imposed if the costs are actually due.

The fact that the employee need not have incurred them (for example, he or she might have conducted his or her own defence instead of engaging lawyers to act) does not mean that the costs were not imposed.

An employee may be required in his or her capacity as such to act in some other capacity (for example, as a trustee of the employer’s pension fund). Liabilities in respect of the second capacity will be treated as liabilities in respect of the first.

See EIM30523 for the exclusion of matters that it would be unlawful to insure against.