Deductibility of legal fees under joint retainers

When a company needs legal advice the tax consequences are often overlooked. Unfortunately the tax position on legal fees is highly fact specific to each case. The position is also not uniform across the different taxes. However legislation and case law provide some broad guidelines.

A common but complex scenario involves legal advice for employees but paid for by the employer. Typically if an employee faces legal action in relation to their employment the employer is also involved as a party. This can happen at the start or later if the employer is deemed vicariously liable for the employee’s actions. Employers usually have more resources to pay damages than private individuals and hence are a more attractive target.

To manage this risk the employer and the employee may enter a joint retainer agreement with a law firm. The employer typically pays the fees ...