Introduction

Employers may meet the liabilities of their employees when they arise as a consequence of their employment duties, particularly those involving legal proceedings. To cover these liabilities, an employer will often take out an insurance policy.

Employees’ liabilities

Legal proceedings can be instigated against employees or directors either by other employees or by third parties. Often, the legal costs and any resulting liabilities will be met by an employer. An employer may choose to purchase insurance to meet all such costs.

Where an employer meets an employee’s employment-related liability, a tax charge may arise under ITEPA 2003, s 62. Employer-arranged indemnity insurance is instead normally within Chapter 10 of the benefits code (see the Contractual and pecuniary liabilities guidance note).

In some circumstances, there may not be a charge to tax.

Relief for the costs of liabilities and insurance costs

ITEPA 2003, ss 346–347 provide tax relief for the costs of liabilities and insurance costs whether incurred by an employer or by an employee. A deduction can be claimed in relation to: