F5. Employee expenses

- Certain expenses of litigation and procedures relating to employment deductible

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Deduction of expenses

- A deduction from earnings may be made for in essence (ITEPA s.346):

(1) A liability related to the employment. 

- Liability related to the employment - see s.348.

- HMRC seem to say that a compromise settlement is only included if the claim would, if pursued, be likely to succeed (at least in part) - EIM30511.

(2) Costs and expenses incurred in connection with a claim related to the employment.

(3) Costs and expenses incurred in connection with giving evidence about a matter related to the employment.

(4) Costs and expensed incurred in connection with proceedings/investigations (including criminal proceedings) in which acts to the employee or other matters related to the employee are being or are likely to be considered.

- Deduction permitted even if expenses were not 'necessary' (EIM30511).

- Exclusion for tax avoidance arrangements. 

- No deduction for liabilities, costs or expenses that it would be unlawful to insure against (s.346(2)).

- This covers reimbursement of fines and penalties for criminal acts (EIM30501).

- Deduction only permitted against earnings of employment concerned (EIM30505).

- NICs rules also allow a deduction - SI 2001/1004, Sch 3, Part X, para 10

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Termination of employment

- Exclusion for similar types of expense/liability from the charge on termination of employment (ITEPA s.409).

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Former employee costs/liability

- Potential deduction for similar types of expense/liability under ITEPA s.555 - 564.

- See EIM30530.

- Limited to 6 tax-years post-employment (EIM30534).

- Excess of deduction over total income for the year is treated as a capital gains loss (EIM30532).

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Reimbursement 

- Where the expenses are reimbursed by insurance see:

- N2. Purchase of insurance.

- N3. Insured event occurs.

- Where the expenses are reimbursed by the employer, that will usually be employment income, but the income and deduction will often net off.​

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NICs position

- NICs operates, in general, by way of disregard of certain payments rather than by way of allowing deductions.

- If the employer pays for or reimburses the employee for expenditure that falls within s.346, that payment is disregarded as earnings for NICs purposes (SSCR, Sch 3, Part 10, para 10; NIM05665).

- Does not apply to salary sacrifice arrangements.

- If the employee incurs the cost him/herself and is not reimbursed, there is no NICs relief. 

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​​Legislation: ITEPA s.346 - 350; s.409; s.555 - 564; SSCR, Schedule 3; 

Cases: 

HMRC manuals: 

EIM30501 - Deductions: directors' and officers' liabilities: general;

EIM30505 - relief due;

EIM30511 - qualifying liabilities;

EIM30530 - relief for ex-employees; 

EIM30532 - relief for "excess" liabilities;

EIM30534 - time limits;

NIM05665 - Class 1 NICs: Expenses and allowances: Employee liability insurance; 

Commentary: 

See also:​

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