A "special" discretionary bonus paid when a civil servant retired from what is now the department of Business Innovation and Skills (BIS) was found by the First Tier Tax Tribunal to constitute earnings.

Mr Philip Bovey was employed by the DTI, BIS’s predecessor and he retired on 5 April 2007. It was decided to award him a £6,500 bonus some 8 months following his retirement. It was received net of tax. The bonus was not contractual, it was discretionary. He claimed on his 2007/08 Self Assessment tax return that the payment was in connection with his termination (s401 ITEPA 2003) and not his employment and so covered by the £30,000 exemption.  

In May 2011 BIS confirmed that the payment was “a special merit bonus in recognition of your excellent work on company law reform”. Mr Bovey tried to argue that this was not a bonus under the senior civil service pay scheme it was ex-gracia. The Tribunal decided on BIS’s word that the payment could only be employment related and so it was taxable as earnings under s63 ITEPA 2003.

Our comment

Civil service pay seems rarely out of the headlines. It is often far from transparent which does not assist if you are trying to tax it or Self-Assess, it seems. Civil servants are paid a variety of bonuses and some are paid on a discretionary basis on retirement. Once in a while a Freedom of Information request, or a body such as the Public Accounts Committee flags up some odd discretionary payments. Civil servants and tax advisers alike may care to ponder the tax treatment.

If a leaving payment is non-contractual and the employer writes and says something like “paid in recognition of your work in…” then you are pretty much guaranteed that a Tribunal will agree that it is employment-related. The employer should then operate code OT - see PAYE Codes: leavers & OT code

However, if the employer had said something like, “paid ex-gracia” and given no further explanation it might have been very different. Each case will turn on its own facts and so whether in private or public sector it is advisable to make friends with your HR department if you are leaving because their evidence definitely counts - see Tax on leaving payments


Philip Bovey v HMRC [2012] TC01920