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Fair Bargain / Legal fees paid by employer

lippy
Posts: 2
Joined: Mon Apr 17, 2017 9:31 pm

Fair Bargain / Legal fees paid by employer

Postby lippy » Mon Apr 17, 2017 9:40 pm

Folks,

My employer agreed to settle an issue out of court and agreed to pay legal fees.

I have been taxed on the settlement as this related to pay.

However my employer has also placed the legal fee on my payslip as an 'Exp Tax/NI Adj' and I have now been taxed and have paid NI on the amount even though I have never received it. The money was paid directly to my solicitors.

I have never been in possession of the legal fee.

Can someone advise me here as I believe that the legal fees have never been 'earnt' by me and should not be taxed as income.

bd6759
Posts: 2072
Joined: Sat Feb 01, 2014 3:26 pm

Re: Fair Bargain / Legal fees paid by employer

Postby bd6759 » Tue Apr 18, 2017 9:55 pm

Any payment made by an employer to you, or on your behalf, or for your benefit, is employment income.

someone
Posts: 96
Joined: Mon Feb 13, 2017 10:09 am

Re: Fair Bargain / Legal fees paid by employer

Postby someone » Wed Apr 19, 2017 9:26 am

This seems very unfair to me. I have found this:
http://www.xperthr.co.uk/faq/are-payments-made-under-a-settlement-agreement-taxable/62297/

Finally, extra-statutory tax concession A81 provides that the payment of legal costs by the employer direct to the employee's solicitor in respect of the settlement agreement is not subject to tax as long as the payment is made pursuant to a specific term in the settlement agreement and is in discharge of the solicitor's costs incurred solely in connection with the termination of the employee's employment.


So it looks like if your employer terminated your employment then provided your employer paid your solicitor directly then you shouldn't need to pay tax. But if it wasn't part of a termination agreement then you might be stuffed.

The other thing you should look into is whether your employer should also pay the tax due on the legal fees. In my view, if I'd entered into a settlement where the other party had agreed to pay my legal fees then I'd expect to be put back into the same position I'd have been in if I hadn't paid them at all. Your solicitor will be able to advise whether your settlement agreement implies that your employer should also cover any tax liability as a result of them paying your legal fees.

someone
Posts: 96
Joined: Mon Feb 13, 2017 10:09 am

Re: Fair Bargain / Legal fees paid by employer

Postby someone » Wed Apr 19, 2017 9:33 am

And now seen this:
http://www.masonbullock.co.uk/tax-on-settlement-agreements/

Tax on a settlement agreement payment when you are not leaving

When you are not leaving the job, or are carrying on with a different job with the same employer, the rules are slightly different from when you’re dismissed. There’s no £30,000 limit and most payments apart from compensation payments will be taxable as earnings.

If your settlement agreement is for a dispute concerning discrimination, or on account of an accident at work, then it will not be taxable, unless some of it is to make up for lost earnings, in which case that part will be taxable.


I'm not a lawyer but I'd expect that payments of legal fees you've incurred would be a compensation payment.

Your solicitor is probably the best place to go to get more information.

section 44
Posts: 4467
Joined: Thu Oct 30, 2008 12:47 pm

Re: Fair Bargain / Legal fees paid by employer

Postby section 44 » Thu Apr 20, 2017 3:08 pm

lippy wrote:Can someone advise me here as I believe that the legal fees have never been 'earnt' by me and should not be taxed as income.


Do you think that your employer would pay my legal bills for me? If not then why do you think that your employer would pay your legal bills but not mine?

someone
Posts: 96
Joined: Mon Feb 13, 2017 10:09 am

Re: Fair Bargain / Legal fees paid by employer

Postby someone » Fri Apr 21, 2017 7:08 am

Section 44, if you had taken the OPs employer to court and, as part of a settlement, they'd agreed to pay your legal fees, then yes, I'd expect them to pay them for you. I also wouldn't expect you to have to pay tax on the payment.

section 44
Posts: 4467
Joined: Thu Oct 30, 2008 12:47 pm

Re: Fair Bargain / Legal fees paid by employer

Postby section 44 » Fri Apr 21, 2017 9:55 am

someone wrote:Section 44, if you had taken the OPs employer to court and, as part of a settlement, they'd agreed to pay your legal fees, then yes, I'd expect them to pay them for you. I also wouldn't expect you to have to pay tax on the payment.


You're missing my point.

lippy wrote:the legal fees have never been 'earnt' by me and


The OP's employment is clearly central to why his employer is meeting this liability of his (I assume that the solicitor is engaged solely by OP).

someone
Posts: 96
Joined: Mon Feb 13, 2017 10:09 am

Re: Fair Bargain / Legal fees paid by employer

Postby someone » Fri Apr 21, 2017 1:18 pm

I'm not disagreeing that the OP has to pay tax on this - I have absolutely no idea, I'm just commenting on the fact that I think it seems inequitable.

Imagine, for example, that the OPs employer had pursued some frivolous legal case that had no hope of winning. Because it had no hope the OPs solicitor, barrister etc were willing to do it all on account, knowing that he would get costs awarded. The employer was hoping that the OP would fold.

Eventually, at the last minute, the employer agrees to drop the case and pay all the OPs legal costs - which amount to £200K

The OP is now lumbered with a tax bill probably in excess of 80K. Quite possibly this would be enough to bankrupt the OP.

I'm not suggesting that is what happened, or that it's something that is likely to happen other than in a movie, but it doesn't fit with my idea of justice.


Or imagine that the employer refused to pay the contracted pay. The OP sues for the pay he is owed. Obviously the pay itself is taxable but it seems unfair that the OP also has to pay tax on the "income" that was his legal fees in obtaining what he was entitled to. If the amount owing was fairly small (as I imagine it would be in the sort of cases where I imagine this might happen) then it's easily possible that the legal fees could be more than the amount owing and therefore the effective tax rate the OP has to pay is much higher than normal. 1K dispute. 4K legal fees. Basic rate taxpayer - leads to an effective tax rate on the 1K owed of 100%

section 44
Posts: 4467
Joined: Thu Oct 30, 2008 12:47 pm

Re: Fair Bargain / Legal fees paid by employer

Postby section 44 » Fri Apr 21, 2017 1:46 pm

... 'spose the OP could seek a settlement on the basis that the employer pays legal fees on a grossed-up basis, perhaps?

someone wrote:seems inequitable


... or perhaps time to get your petition started and march on parliament

as ever, fairness = somebody else, rather than me, paying tax

someone
Posts: 96
Joined: Mon Feb 13, 2017 10:09 am

Re: Fair Bargain / Legal fees paid by employer

Postby someone » Fri Apr 21, 2017 2:57 pm

section 44 wrote:... 'spose the OP could seek a settlement on the basis that the employer pays legal fees on a grossed-up basis, perhaps?


Heaven hopes I never get involved in anything like this but at least this is one gotcha I'll now know to watch out for! It wouldn't even have occurred to me that payment of my legal fees as a result of a settlement would ever be taxable.


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