Bankers resigned to bonuses crackdown: Nigel Cope and Robert Chote on the legal loophole firms have exploited to avoid paying of millions of pounds in National Insurance contributions

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The Independent Online
THE announcement yesterday that the legal loophole on bonus payments for high earners was being closed, was met with a collective shrug of the shoulders in the City of London last night.

'We're quite surprised we weren't clobbered before to be honest,' one banker said. 'We've been expecting it.'

As reported on today's front page, the payment of bonuses by means other than straight cash has been common for some time in the high-powered banking and broking community.

Top performers are regularly able to double or treble their salaries in bonus payments and employers have been exploiting the loopholes in the legislation, making the payments in ways that avoid the need to pay National Insurance Contributions.

A few years ago, the method in vogue was payment in gold bars, but the Government moved to stop such schemes in the last Budget. Companies turned to diamonds and fine wines, but Peter Lilley's ruling yesterday appeared to be bringing down the curtain on tax avoidance schemes. They cost the Government an estimated pounds 50m a year in lost revenue.

However, the latest rules only affect employers. They do not affect employees who already pay National Insurance contributions on their bonuses. It is not clear whether the Government's intervention will put an end to such payments or just push accountants and company advisers into devising an even more 'creative' systems.

Such systems can save employers a great deal of money. Top City firms - such as BZW, Goldman Sachs and SG Warburg - are estimated to have paid out bonuses of around pounds 500m this year. Paying the bonuses in gold, diamonds or wine used to mean the employer saved the 10.2 per cent National Insurance contribution payable had the bonus been in cash.

Nomura International, the Japanese investment bank, used to pay London bonuses in gold. SG Warburg has made payments through life assurances policies. And Royal Bank of Canada has made payments in diamonds.

The diamond-backed schemes work like this. The employer agrees to buy the gems, which never leave Switzerland where they must stay to avoid paying VAT. The bonus recipient never actually takes delivery of the diamonds but is given a sales contract instead. He or she then asks the bank to sell the diamonds and transfer the cash to his bank in the UK.

The bank says it may now give up on all such 'alternative' bonus schemes. 'We won't be desperately trying to find a way around it,' a spokesman said.

Life insurance policies are rather more simple manoeuvres. Usually the employee takes out a single premium life insurance policy and the company pays the bonus into it. Or the company takes out a policy and then assigns the rights to the employee. SG Warburg admits it has used the, perfectly legal, scheme, but declines to say exactly how it operates.

Reaction in the City is split on the ramifications of the latest government moves. One said: 'I think this is the end of it. There's no point in wasting time developing something else only for the Government to jump on it.'

Others felt that accountants and advisers would already be busy dreaming up other schemes. Offshore life assurance policies are one possibility; another is the loan of antiques where furniture is lent on an indefinite basis to employees.

One avenue which remains open is payment in company shares which may be deemed more politically correct.

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