Guidance

Deductions: directors’ and officers' liabilities and expenses: amount on which relief due

Published 20 March 2017

Employment Income Manual EIM30509 - deductions: directors’ and officers’ liabilities and expenses: amounts on which relief due

Section 346 Income Taxes (Earnings and Pensions) Act (ITEPA) 2003 gives directors and employees deductions against the earnings of an office or employment for:

• amounts and connected expenses paid in respect of their liabilities related to the employment
• costs or expenses incurred in connection with a claim that they’re subject to such a liability or proceedings related to, or arising out of, a claim that they’re subject to a liability related to the employment
• so much of any premium paid under a qualifying contract of insurance as relates to indemnifying them against any such liabilities, costs or expenses

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

From 6 April 2017, Section 346 is amended to include further deductions.

For tax year 2017 to 2018 onwards, a deduction is also available against the earnings of an office or employment where an employee incurs costs or expenses in connection with giving evidence in or for the purposes of proceedings (or some other process or an investigation) about a matter related to their employment. The relief applies even if no other action is likely to be taken against the employee as a result of the proceedings.

‘Giving evidence’ includes answering questions and making a statement either formally or informally.

‘Proceeding or other process’ includes civil, criminal, disciplinary or arbitration proceedings and any process for resolving disputes or adjudicating complaints, and the exemption includes costs or expenses relating to any proceedings or investigations likely to take place.

Example

If an employee gives evidence before a public inquiry about matters relating to their employment, even though an allegation hasn’t been made against them, they’re entitled to a deduction against their earnings for any expenses incurred for obtaining legal support.

Employment Income Manual EIM30513 - deductions: directors’ and officers’ liabilities and expenses: qualifying contracts of insurance

Section 349 ITEPA 2003

The basic characteristic of a qualifying contract of insurance is that it provides cover:

• to one or more employees against qualifying liabilities or costs arising from claims that they’re subject to qualifying liabilities
• to an employer against loss arising from meeting any qualifying liability of an employee

Excluded contracts

A contract of insurance is excluded from qualifying if it:

• covers any risks other than those set out in Employment Income Manual EIM30509
• is connected with any other contract (except for a contract of employment)
• provides the policy holder with anything (to which a significant part of the premium is attributable) other than the cover itself and the right to renew that cover
• gives cover for more than 2 years (except by virtue of renewals)
• includes a provision requiring the insured to renew it

Note that Section 346 ITEPA 2003 (see Employment Income Manual EIM30509) has been amended with effect from 6 April 2017 to include additional liabilities and expenses for which a deduction is available.

The effect of the first exclusion is to exclude from relief premiums for mixed policies; that’s, policies that cover both qualifying and other liabilities. If such policies weren’t excluded it would be necessary to apportion premiums between cover that was qualifying and other cover. Such apportionment could be very complex.

The purpose of the exclusions is also to keep the operation of the relief relatively simple by excluding policies that go significantly beyond the provisions of annual cover against qualifying liabilities and costs and expenses associated with them.

See Employment Income Manual EIM30517 for more detail about the ‘connected policy’ exclusion.

Employment Income Manual EIM30530 - deductions: directors’ and officers’ liabilities: relief for ex-employees

Section 555 and 556A ITEPA 2003, Section 67 FA 2009

Section 555 ITEPA 2003 provides for deductions from total income for ex-employees’ uninsured liabilities:

• that they themselves have to bear
• that are not deductible under Section 346 ITEPA 2003 (see Employment Income Manual EIM30501 onwards) but would be so deductible if the ex-employee had:
  • continued to hold the office or employment in respect of which the liability arose
  • met the liability out of the earnings of that office or employment

Note that Section 346 ITEPA 2003 (See Employment Income Manual EIM30509) has been amended with effect from 6 April 2017 to include additional liabilities and expenses for which a deduction is available.

The provisions also effectively cancel out charges under:

• Part 6 Chapter 2 ITEPA 2003 (benefits from non-approved or employer-financed pension schemes)
• Part 6 Chapter 3 (payments, including `valuable consideration’ provided in connection with the termination of an employment)

Where the charge would arise as a result of someone other than the employee:

• bearing the employee’s qualifying liability (see Employment Income Manual EIM30511)
• providing him or her with a cover under a qualifying contract of insurance (see Employment Income Manual EIM30513)

No deduction is allowed for a payment that would otherwise meet the conditions of Section 555 if it’s made in pursuance of arrangements the main purpose, or one of the main purposes of which, is the avoidance of tax.

Employment Income Manual EIM13675 - termination payments and benefits: Section 401 ITEPA 2003: exceptions: payments and benefits in respect of employee liabilities and indemnity insurance

Sections 409 and 410 ITEPA 2003

Employment Income Manual EIM30501 explains that certain office holders and employees may face legal action in respect of their actions.

Where a payment or benefit within Section 401 ITEPA 2003 (see Employment Income Manual EIM13000) is received in respect of such liabilities, it’s excepted from charge under that section if the following conditions are met:

• the benefit is in cash form and is given to meet the cost of a deductible amount (see below)
• the benefit is in non-cash form and represents a benefit equivalent to the cost of paying a deductible amount (see below)

A deductible amount is an amount that meets all of the following conditions:

a) The individual pays the amount.

b) A deduction for the amount would be allowed under Section 346 ITEPA 2003 if the individual still held the employment when the amount was paid. For this purpose, apply the guidance in Employment Income Manual EIM30501 as if this were the case.

c) The amount is paid between (1) the day the employment terminated and (2) the 5 April falling more than 6 years after the date in (1). For example, if the date in (1) were 31 December 2003 then the date in (2) would be 5 April 2010.

If the individual has died and a payment or benefit is received by personal representatives, it’s also excepted from Section 401 provided that it is:

• paid by the personal representatives
• meets condition b above (on the assumptions that the individual is alive, in employment and had paid the sum) and meets condition c above

From 6 April 2017 the scope of the relief is expanded to include amounts paid by or on behalf of the individual by the employer, former employer or personal representatives.