Tax Treatment of Legal Fees

TaxBriefing (Issue 51) outlined the tax treatment of legal fees recovered by an employee as part of a court action to recover compensation for loss of office or employment, etc. The purpose of this article is to outline the tax treatment of legal fees paid by an employer on behalf of an employee or director in certain other circumstances.

Breaches of Employment Law

Revenue wishes to clarify that the tax treatment set out in Tax Briefing (Issue 51) referred to above applies also to legal fees recovered by an employee or director as part of an action taken for breaches of employment law by the employee or director against his or her employer.

Legal fees connected with disciplinary matters

The scope of the Schedule E charge is wide ranging and legal fees paid by an employer on behalf of an employee or director are within that charge. Notwithstanding this, the Revenue Commissioners are prepared to regard the payment of legal fees incurred by an employee or director and paid on his or her behalf by an employer as not giving rise to an income tax liability in the employee’s/director’s hands where those fees relate to an investigation / disciplinary procedure instigated by an employer and all of the following conditions are met:

1. The fees are what are termed ‘legal fees’ (i.e. fees due to a member of the legal profession arising from representing the employee/director)
2. The payment on behalf of the employee/director represents a full or partial discharge of legal fees incurred by the employee/director only in connection with the investigation/disciplinary procedure instigated by her/his employer (i.e. the tax treatment outlined in this article does not apply to legal or other fees incurred on other matters)
3. The legal fees are paid by the employer directly to the employee’s/director’s legal representative and only after having had sight of the invoice relating to such fees (i.e. on sight of the invoice issued to the employee/director by the employee’s/director’s legal representative)
4. Where the investigation/disciplinary procedure instigated by the employer, or the action taken by an employee/director, results in a settlement^* being made to the employee/director by the employer, the discharge of the legal fees on behalf of the employee/director must form part of a specific term of any such settlement agreement.

Enquires on this article should be addressed to taxbrief@revenue.ie