Termination Payments and Legal Costs

What is the tax treatment of legal costs recovered by an employee from an employer as part of a court action to recover compensation for loss of office or employment, etc?

Any payment made by an employer in respect of an employee’s legal costs is assessable to income tax under Section 112 TCA 1997 or Section 123 TCA 1997 in addition to the compensation payment itself. The question of assessment under Section 112 or 123 will be determined by the nature of the compensation payment being made. However, if the following conditions are satisfied, Revenue are prepared to accept that no income tax charge will be imposed on the employee in respect of the payment of legal costs where the payment:

• Is made by the former employer directly to the former employee’s solicitor
• Is in full or partial discharge of the solicitor’s bill of costs incurred by the employee only in connection with the termination of his/her employment and
• Is under a specific term in the settlement agreement.

This treatment applies only to legal costs and applies to payments made either under a court order or where a settlement is reached outside of court.