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Legal Fees

Hello

Our client has incurred solicitors fees and a settlement (not sure if out of court) in relation to an unfair dismissal case.

Are the legal fees and actual settlement allowable as a CT deduction?

Thanks in advance

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04th May 2010 17:53

Yes & No

If he had won the case then they are a legitimate business expense, if he lost the case then they are not as they are the cost of an "illegal" act.  If there was a "pre trial" settlement that would amount to an admission of guilt.

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By Anonymous
04th May 2010 18:33

I disagree

Some years ago I had an employer client that lost an unfair dismissal case. Inland Revenue allowed the costs. That doesn't necessarily confirm that the treatment is correct, any more than their manuals do, but it is at least in accordance with their published guidance -

"The outcome of the proceedings (whether the taxpayer 'wins' or 'loses') does not determine if the expense is deductible"

PC

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05th May 2010 09:40

Me too.....

......we have had more than one case where it has been successfully argued that the legal costs in such instances were expended wholly and exclusively for the purposes of the business and thus allowed in full.

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By Anonymous
05th May 2010 11:19

Unfair dismissal isn't illegal,

it's unlawful.  There's a difference (awaits the I'm a barista and I know what I'm talking about barrage).  If the taxpayer acted unlawfully for the purposes of the business, that needn't preclude a successful claim for relief.

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05th May 2010 14:23

Profiting
 

If you have made a "sucessful claim for relief" where a court of tribunal has ruled against the client then you are in breach of the judicial guidelines - which overule any HMRC ruling.  It is an offence to profit from any illegal/unlawful act and obtaining tax relief on the costs of unsucessfully defending such an act would amount to profiting in that a portion of the costs are, effectively, being borne by the taxpayer.

 

As regards anonymous' offensive coments - simply too infantile to warrant a response.  I will wait until you can make an adult point.

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By Anonymous
05th May 2010 14:38

Profiting?

If the case goes against the employer, such that he has to stump up compensation, he can hardly be said to have profited from the unlawful act. Tax relief might mean that his loss is less than it might otherwise have been, but he has not profited - certainly not in the ordinary sense.

But, semantics aside, if what you are saying is that my former client obtained an unlawful tax deduction (aided and abetted by HMRC) then I invite the CPS to take up the case and prosecute my client. The question was whether the fees can be deducted for tax. HMRC say they can, so they should be. What happens next is another matter.

PC

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05th May 2010 14:58

Compensation (damages) =/= Fine
Civil proceedings

A revenue payment, in settlement of a civil action arising out of a trade, may be allowed as a trading deduction where the allegations were neither admitted nor proved (see Golder v Great Boulder Proprietary Goldmines Ltd [1952] 33TC75). Where liability was admitted or proved, a deduction may be allowed where the payment was restitutionary, but not if it was punitive.

So if the point of the award was just to compensate the claimant, rather than punish the employer, it would seem to be allowable

But it has to be in connection with the trade, rather than be incidental to it

So, and here's something I didn't know, damages awarded against a newspaper for libel are apparently allowable, but if someone else were to libel a competitor, and lost, the damages would not be allowable.

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05th May 2010 18:17

Courts v HMRC

But, semantics aside, if what you are saying is that my former client obtained an unlawful tax deduction (aided and abetted by HMRC) then I invite the CPS to take up the case and prosecute my client. The question was whether the fees can be deducted for tax. HMRC say they can, so they should be. What happens next is another matter.

PC

 

Posted by Anonymous on Wed, 05/05/2010 - 14:38

 

What I'm saying is that, in cases where the client lost, the courts would not agree with the Revenues treatment, and as a tax payer, neither do I. I see no moral arguement to support the taxpayer losing a penny as a result of costs incurred becase of wrongdoing (which of course is what they did if they lost).  

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By Anonymous
05th May 2010 18:45

Morals

If you look back to my original post, you will see that I never said tax relief was correct (nor indeed moral). But the fact is that IR allowed the deduction. I am quite happy for you to claim the moral high ground on this one. But if IR/HMRC tell me that my client can have a deduction for an expense I would not be acting in that client's best interests (sadly, I don't have the entire taxpaying population as a client base, though judging by your previous claims you must be getting close to it, so I don't have to worry about conflicts of interest) if I were to disallow the expense in my computations. It may not be moral, it may not be correct, but if HMRC allow it I'm not going to argue. Laudable though your views are, my prime concern is the best interest of my clients.

But here's a thought to stir the pot: what about the barrister who represents a serious criminal, knowing full well that the individual is guilty but who nevertheless seeks to minimise the penalty to his client, and in the worst cases seeking out a minor technical infraction so that his client escapes Scot-free? (For instance, allowing a drug baron to walk free because someone forgot to sign or date a piece of paper.) The barrister will presumably be remunerated from some source for his services. Although he didn't himself perpetrate the offence, he is nevertheless profitting from an illegal act. Everyone is entitled to a fair trial and to legal representation, I accept, but please don't preach about morals.

 

PC

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05th May 2010 18:58

So ...

... how would you advise a client in the situation outlined above?

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05th May 2010 19:09

Not a moral point but a legal one

 

I'm not making a moral point, I'm making a legal point.  If a court had this matter before it, HMRC would be told in no uncertain terms that they cannot allow costs in this case as a deductable charge against taxable profit.  To do so would be against the basic principals of law.  It seems that HMRC are, in actual fact, acting unlawfully (whatever their rules & regulations say) because no one, not even the government, can pass any legislation which contravenes the basic principals of law.

 

As regards your point about barristers defending someone who is guilty.   Perhaps I should quote the code of conduct which applies in such circumstances -

 

9.10 A barrister to whom a confession of guilt is made by his client must observe the following rules:
 

(a) If the confession is made before the proceedings have started, he may continue to act only if the accused pleads guilty or where the accused pleads not guilty then he may continue to act subject to the limitations referred to in the following sub-paragraphs.


(b) If the accused is not pleading guilty the barrister must explain to the accused that the conduct of his defence will be limited in the manner as set out in sub-paragraph below.


(c) A barrister must emphasise to the accused that no substantive defence involving an assertion or suggestion of innocence will be put forward on his behalf and that, if he is not satisfied with this approach to the conduct of the trial, then the accused should seek other advice. A barrister should in such situation advise his solicitor to keep an attendance note in writing of the fact that the accused has been so advised by the barrister and in the presence of the instructing solicitor.


(d) If the confession is made during the proceedings or in such circumstances that a barrister cannot withdraw without compromising the position of the accused he should continue to act but subject to the limitations on the conduct of the defence being that he may not set up an affirmative case inconsistent with the confession such as by asserting or suggesting that some other person committed the offence charged or by calling evidence in support of an alibi or by calling the accused to give evidence to deny the charges or support an alibi.

 

 

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By Anonymous
05th May 2010 19:26

PC

I'm with you on this one. In other posts there have been many complaints that employees have falsely accused employers of discrimination, etc. In many cases, employers pay off the employee to avoid the stress, and the horrendous cost of defending. I have seen this happen first hand.

I am not saying I agree with this, in fact I personally believe cheats & liars should never be rewarded, but I cannot, and would not, force my opinion onto others although I would try to explain the consequences, both to themselves and others who follow and may suffer as a result. 

I would say we apply the rules as best fits our clients, we may argue for HMRC to make allowances but I cannot see any accountant arguing for our clients to pay more tax. We are not judge, or jury, we just apply the rules.

OC

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By Anonymous
05th May 2010 20:14

"I'm not making a moral point"

Yet - "I see no moral arguement ..."

"If a court had this matter before it, HMRC would be told in no uncertain terms that they cannot allow costs in this case as a deductable charge"

If a court had this matter before it - simply involving employer v employee - I don't imagine HMRC would be told anything whatsoever, in certain terms or otherwise.

Back to the original question - are the costs deductible for CT purposes? I'm interested only in HMRC's current stance - if they allow the costs, then they are deductible in the first instance. So who is going to challenge that treatment such that the question ends up in front of a judge? You can be pretty sure the taxpayer won't, and unless HMRC are reading this exchange and suddenly change their policy, they won't either. Pontificating about the morals of the deduction, or the barristers' code of practice, regarding some hypothetical case does not answer the OP's straightforward question based on a real-world issue, to which there is a straightforward answer.

PC

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05th May 2010 22:57

PC

Yet - "I see no moral arguement ..."

"If a court had this matter before it, HMRC would be told in no uncertain terms that they cannot allow costs in this case as a deductable charge"

If a court had this matter before it - simply involving employer v employee - I don't imagine HMRC would be told anything whatsoever, in certain terms or otherwise.

PC

Posted by Anonymous on Wed, 05/05/2010 - 20:14

 

 

It appears you are being pedantic for the sake of being so.  It is perfectly clear that the matter I refer to is that of the allowability of costs against tax - not the original case betweeon employer & employee.

 

"Pontificating about the morals of the deduction, or the barristers' code of practice, regarding some hypothetical case does not answer the OP's straightforward question based on a real-world issue, to which there is a straightforward answer."

PC

Posted by Anonymous on Wed, 05/05/2010 - 20:14

 

Then why did YOU put the hypothetical case and request an answer?  Could it be that you were trying to make a "moral point" and now do not like the answer you got?

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By Anonymous
06th May 2010 08:16

I don't recall asking any question that required an answer

I'm quite happy with your answer, because I don't think it has any relevance to the real world. The OP asked if the costs etc are deductible against tax (not would they be deductible iof the matter were to be discussed in court) and since HMRC's view is yes, the immediate answer is yes and anyone who were to prepare a computation otherwise would not be acting in his client's best interests.

It may well be the case that if the matter of deduction were put in front of a judge he would rule that the costs are non-deductible. But that is hypothetical - as I said above, who is likely to take the matter to court?

As we know, HMRC are not always right, and they may well be wrong in this case. But the fact is that they currently allow the deduction. So if I think HMRC's view is not supported by law, but is nevertheless to the advantage of my client I will follow HMRC's directions. If  on the other hand the alternative would best suit my client that's the approach I would take.

PC

PS - per my title to this thread, point me to where I asked a question requiring an answer

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06th May 2010 08:50

Final response to PC

But here's a thought to stir the pot: what about the barrister who represents a serious criminal, knowing full well that the individual is guilty but who nevertheless seeks to minimise the penalty to his client, and in the worst cases seeking out a minor technical infraction so that his client escapes Scot-free? (For instance, allowing a drug baron to walk free because someone forgot to sign or date a piece of paper.) The barrister will presumably be remunerated from some source for his services. Although he didn't himself perpetrate the offence, he is nevertheless profitting from an illegal act. Everyone is entitled to a fair trial and to legal representation, I accept, but please don't preach about morals.

 PC

Posted by Anonymous on Wed, 05/05/2010 - 18:45

 

So you don't think such an issue is likely to come before a court?  Clearly you have no idea just how often HMRC do in fact end up being questioned in the courts, a number which with the new regime is guaranteed to increase.  HMRC are being chalenged more & more in the courts - the greater their powers to destroy lives with their arbitary penalties, the greater the number of people (quite rightly) challenging them in the courts.

 

Turning to your commernts quoted above -so - you expect to put the above and NOT invite comment?

As i and everone else cn see you are now being pedantic to the point of being silly.  Quite clearl;y the above invited comment - if you didn't want a reply WHY WRITE IT ?

It seems that you are deliberately setting out to inflame a response - which renders your comments pointless.

 

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By Anonymous
06th May 2010 09:48

Final response from PC

Inviting comment is quite a different matter from "asking a question and expecting a reply". Though in fact I wasn't even inviting comment. My 'question' was clearly rheotorical, posted merely to illustrate the double-standards that are all too-evident.

I never said that the matter would not be brought up in court, however likely or unlikely I might consider that to be. But I am more concerned, as I assume the OP is, about the current position. The current position is that such costs are allowable by HMRC. Until such time as the position is challenged in the courts - which might be next week, it might be in 10 years time - the costs are deductible. If that's a pedantic view, so be it.

This discussion is going nowhere so this is indeed my final contribution on this thread. But you are welcome to have the last word. Being very much in the minority I guess you're entitled to it.

PC

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By Anonymous
10th May 2010 11:50

Deductible for CT

 From a slightly different aspect.

Having employees means that there is a normal business risk of finding yourself in front of a tribunal. One makes effort, at a cost, to avoid it but difficult. As a normal business risk it should be deductible for CT irrespective if one lost. One can lose on a technicality. Calling that an illegal act seems a bit far fetched.

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10th May 2010 12:21

employment law expert

The questioner asked: 'Our client has incurred solicitor's fees and a settlement (not sure if out of court) in relation to an unfair dismissal case. Are the legal fees and actual settlement allowable as a CT deduction?

Answer: Obviously, these payments are a business expense, albeit a statutory breach of contract (being a breach of the fairness of employment legislation) on the part of the employer in this case.

Advisers can find the information that relates to this query in the extra-statutory concession A81 that sets out in EIM13740 that payments of legal costs to an office-holder or employee will receive special treatment where:-

(1) if the legal dispute is settled without recourse to a court or tribunal, no charge will be imposed under s.401, Income Tax (Earnings and Pensions) Act 2003, on a payment made by the employer directly to the employee's solicitor as long as the payment is made with regard to a specific term in a settlement agreement and the payment is in full or partial discharge of the solicitor's costs which have been incurred solely in connection with the termination of the employee's employment.

(2) if the dispute is heard by a court or tribunal, no charge will be imposed on a payment of costs made by the employer, even if this is paid directly to the employee so long as the payment is made pursuant to an order of the court or tribunal.

As for the question of morals, this would only arise to be considered if Parliament had put such a provision in the Act or Statutory Instrument. If not, then the question of morality would not be material or fall to be considered. 

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By Anonymous
10th May 2010 12:28

How,

does the treatment of the payment in the hands of the employee, automatically generate the conclusion that it's an allowable CT deduction (which it is, but not for that reason)?

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By chatman
10th May 2010 13:22

Illegal/Unlawful

 What is the difference between illegal and unlawful?  Is it similar to something being decriminalised, but not made illegal? I never understood the difference. Sorry for digressing; I hope I do not get censored for this.

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10th May 2010 14:14

Allowable

Both the legal fees and the payment to the former employee are allowable deductions.

End of.

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12th May 2010 10:45

illegal/unlawful

Two examples which explain that which is illegal or unlawful:

illegal - a cheque given in payment of a bet is given for an illegal consideration and the payee cannot sue thereon; but it is not illegal to give the cheque or pay the lost bet.

unlawful - any act that the law forbids such as murder, obstructing a highway, etc (and if you are an accountant doing things such as making agreements to commit a crime or tort, or agreements contrary to public policy, agreements perverting the course of justice, agreements in restraint of trade, agreements to defraud the revenue - ouch!)

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By chatman
12th May 2010 16:21

I am being a bit dumb

I could not really understand that explanation, so I looked it up here http://legallad.quickanddirtytips.com/illegal-versus-unlawful.aspx It seems to say exactly the opposite. Am I being really thick? 

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