Employees have historically enjoyed the benefit of a tax concession which allows his or her legal fees to be paid by the employer and to escape tax when they are paid as part of a settlement agreement. The concession is being amended, and the revised tax concession is being formally enacted by Regulation 10 of the Enactment of Extra-Statutory Concessions Order 2011 and will affect payments made on or after 6 April 2011.
Previously the tax concession applied to legal costs ordered by a court or tribunal or costs paid direct to a lawyer under a settlement agreement, including compromise agreements and COT3 agreements. However, there have been problems with the drafting of the Order which as drafted would now exclude COT3 agreements and compromise agreements which refer only to the Equality Act 2010 (as opposed to the ERA 1996). HMRC has confirmed that it is reviewing the Order and that the Extra Statutory Concessions Order can continue to be used for compromise agreements under the Equality Act 2010 pending amending legislation. It will also look into the issue of the current exclusion of COT3s and other settlement agreements and, if necessary, amend the legislation.