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I act for two former workers in a disbanded professional partnership; one was a salaried partner (assessable under Schedule E), the other an ordinary employee.
My clients have recently been advised that they are likely to be sued for negligent work carried out by the employee. Whilst the salaried partner was not involved with this work, she appears to be the only solvent 'partner'. She has the advantage of some indemnity insurance, but the employee does not.
I act for two former workers in a disbanded professional partnership; one was a salaried partner (assessable under Schedule E), the other an ordinary employee.
My clients have recently been advised that they are likely to be sued for negligent work carried out by the employee. Whilst the salaried partner was not involved with this work, she appears to be the only solvent 'partner'. She has the advantage of some indemnity insurance, but the employee does not.
They are currently looking at their options and want to know whether they can claim tax relief for anything that they end up paying out and any related professional costs.
(Query T16,076) - Aleph.
There is a form of relief for post cessation expenditure. The relief (in section 109A, Taxes Act 1988) includes expenses connected with remedying defective work. The relief is given as a deduction from taxable income whatever the source of that income and in the income tax year in which the expense is paid. This is on the proviso that the expense is incurred within seven years of the cessation of trade and is claimed within twelve months of the 31 January following the year of payment.
However, this relief is only available where the business was assessed under Schedule D and not under Schedule E. We would, therefore, need to look at section 201AA, Taxes Act 1988. That provides relief for employees where there is a payment of a qualifying liability. This is, basically, an act or omission of the individual in the individual's capacity as office holder or employee. Normal Schedule E rules apply but, where the employment has ceased, section 92, Finance Act 1995 allows the relief to reduce the ex-employee's income for the year of payment.
The relief applies to the costs of meeting and defending claims, provided the payment is made in the year the employment ceased or in any of the following six years.
My only concern relates to some of the small print. The salaried partner was not involved in the negligent work. Therefore, was the negligent act something she became liable for in her capacity as an employee? If it was not, it is arguable that the costs of paying a claim would not be allowable. The costs of defending the claim should be allowable because the claim will be that the negligence arose from the employment.
Furthermore, I would suggest that the employee/partner does not rush into a settlement on the assumption that relief will be due. It is not unknown for the Inland Revenue to examine the fine detail of a payment and argue that, as it was an out of court settlement, it could not meet the terms of the relief. - JWG.
It seems that there are two aspects to be considered here, legal and tax.
Not being a lawyer, my thoughts on the first aspect must be heavily qualified, but the first thing that should be established is who is 'in the firing line'? The term 'salaried partner' can be used in the context of either the employed or self employed as explained by the Revenue in the Inspector's Manual (at paragraph 236):
'Either:
(1) an employee, not a partner at all, who is given the title for prestige and who may be remunerated in part by reference to the firm's profits. His name may even appear on the firm's notepaper. But, if it does, he bears liability only to those who have advanced credit to the firm in the belief that he was a partner (section 12, Partnership Act 1890). He is not liable for the firm's tax; or
(2) a partner who is entitled to a first share of profits, and who is in all other respects an ordinary partner.
'The true status of the person concerned has to be determined according to the circumstances of each case.'
Assuming that the 'partner' falls within category (1), above, presumably legal advice has been taken to confirm that she has responsibility for the employee who has acted negligently.
With regard to the tax aspect, relief is likely to be available under section 92, Finance Act 1995 ('post-employment deductions'). If a similar situation had arisen while the employees were still in the employment to which the claim related, entitlement to relief would potentially be under section 201AA, Taxes Act 1988 ('employee liabilities and indemnity insurance'). However, that section remains relevant as section 92 relates its relief to the section 201AA conditions.
Briefly, the amount deductible must be:
* an amount paid in or towards the discharge of a 'qualifying liability' of the employee (or costs in connection with a claim or premiums towards a professional indemnity insurance policy);
* borne by the employee himself/herself (i.e. not by the previous employer, etc.); and
* incurred in the year in which the employment to which the claim relates ceased or the following six years.
'Qualifying liability' is defined as one which is imposed either in respect of any acts or omissions of the person in his capacity as holder of the office or employment or in connection with proceedings.
If the allowable amount exceeds the claimant's income for the year, then, subject to conditions, relief may be claimed against capital gains in that same year.
The Revenue's views on this relief are contained in its Tax Bulletin of October 1995. - Southern Man.
