Lilley corks up chateau-bottled bonuses

THE CITY practice of paying high-flying employees bonuses in vintage claret or diamonds to avoid making National Insurance contributions was outlawed from midnight last night.

In a move at once populist and fiscally orthodox, Peter Lilley, Secretary of State for Social Security, announced yesterday that 'gemstones and certain alcoholic liquors' would be treated as payment for earnings and therefore liable for NI contributions.

Warning that he would clamp down on alternative ways of avoiding employer contributions, Mr Lilley said: 'Companies and their accountant advisers who devise ways of paying earnings which avoid their liability for National Insurance contributions will find it increasingly unattractive to produce and operate such schemes.'

Under a common form of bonus payment drawn up for banks and investment houses by leading firms of accountants, employees are paid in diamonds, platinum or cases of chateau-bottled wines which are held offshore - for example in Switzerland - so they do not incur British VAT or excise duty. The employee is then given a sale contract and the proceeds transferred to his or her bank account.

The latest measure is part of a progressive tightening of NI loopholes which began in 1988 when legislation made payment in gilts liable for employer NI contributions. This was followed by regulations making stocks and shares and then gold bullion liable.

The loss to the Exchequer from payment in wines and jewels - which saves employers their normal 10.2 per cent contribution - has been estimated at pounds 50m a year. Officials reckon NIC avoidance schemes may have accounted for over half the pounds 500m paid during the past year in bonuses by big City investment and broking companies.

The new regulations specifically target gems and alcoholic drinks on which UK duties have not been paid. The schemes worked only if firms can acquire the goods without paying duties.

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