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Employee's Tribunal Legal Costs not tax-deductible

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Thanks to Ed McFarlane of Deminos HR for preparing this case summary

Can an employee claim income tax relief on legal costs (and an adverse costs award) arising from his employment tribunal claim?

No, held the First Tier Tribunal Tax Chamber, in Wardle v Commissioners for HMRC, applying s336 of the Income Tax (Earnings and Pensions) Act 2003. The Claimant, a banker who had brought employment tribunal proceedings against his former employer (Wardle v Credit Agricole) lost his appeal against an HMRC Closure Notice on his self-assessment, and failed to reduce his income tax bill by offsetting substantial legal costs and was left with an increased tax liability of £49,136.98.

The tribunal ruled that the costs claimed were not incurred by the taxpayer as a holder of employment, nor were they incurred "wholly, exclusively and necessarily in the performance of the duties of the employment" which, given that the expenses claimed mainly arose after the employee had been unfairly dismissed, might not be that surprising, and rejected the proposition that the Claimant necessarily incurred some legal costs as an aspect of his compliance role during employment.

Whereas an employer may be able to offset against tax the costs of tribunal litigation as a business expense, an employee has no right to an offset for the costs of a tribunal claim.

A question not answered by this case is whether a self-employed worker who incurred costs taking an employer to tribunal, e.g. in pursuit of unpaid holiday pay, might be able to offset those costs against income tax as an allowable business expense.