Employment Tax

Employee liabilities and indemnity insurance

Produced by Tolley in association with Paul Tew
  • 25 Feb 2022 15:54

The following Employment Tax guidance note Produced by Tolley in association with Paul Tew provides comprehensive and up to date tax information covering:

  • Employee liabilities and indemnity insurance
  • Introduction
  • Employees’ liabilities
  • Relief for the costs of liabilities and insurance costs
  • Liabilities
  • Insurance
  • Exclusions
  • Policies covering multiple employees
  • Ex-employees
  • Reporting requirements

Employee liabilities and indemnity insurance

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.

If an employer meets the liabilities of an employee or purchases insurance on their behalf, then, typically, a tax charge will arise under ITEPA 2003, s 62 (see the Contractual and pecuniary liabilities guidance note).

However, 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:

  1. the liabilities of the employment

  2. costs and expenses associated with a liability

  3. the amount of an insurance premium

EIM30505

This relief also extends to Class 1 NIC.

Liabilities

The costs must be incurred in relation to a qualifying liability under ITEPA 2003, s 348. This is a liability which arises due to an act or omission by a person in their capacity as holder of that employment. The costs must be in connection with proceedings in respect of this claim.

The costs associated with the

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