Currently an extra statutory concession provides that an employee's legal fees in connection with the termination of employment are tax-free if they are paid by the employer to the employee's lawyer under the terms of a settlement agreement, or are paid pursuant to a court or tribunal order.

An Order codifying this concession with effect from 6 April 2011 appears inadvertently to restrict its availability. The only settlement agreements covered are those which satisfy the conditions regulating compromise agreements under the Employment Rights Act 1996 (ERA), thereby potentially excluding COT3s or other statutory compromise agreements which settle non-ERA rights such as Equality Act claims and which therefore do not include the ERA compromise agreement wording.

The problem has been raised with HMRC, which has confirmed that the extra statutory concession can continue to be used for Equality Act settlements for the time being and that it is looking into the other points; amendments to legislation will then be made, as there was no intention to change the position.