Compromise Agreements and Professional Fees - New Guidance

Posted: 15th May 2011

Redundancies involving senior staff often involve a compromise agreement under which the employee agrees to compromise their right to take a case to the Employment Tribunal in exchange for a payment. When a compromise agreement is being negotiated, it is very important to take legal advice, which raises the question of the allowability of legal fees.
In the past, HM Revenue and Customs (HMRC) have dealt with this by way of an extra-statutory concession, which allows the employer to pay the employee’s professional fees and claim a tax deduction for the expenditure and the employee is not deemed to have received a benefit in kind for tax purposes, provided certain formalities are observed.
HMRC have now sought to regularise the position, but the draft regulations that have been published do not appear to extend the concession to compromise agreements which cover the compromise of certain types of potential claims, such as those under the Equality Act or those undertaken following a successful conciliation by ACAS.
Representations have been made to HMRC and it is to be hoped that the revised regulations will cover all forms of compromised claims.