This scheme operated between November 1996 and July 1997 and was administered by Croxtons Ltd. It was the second Grapevine Scheme as there had been a " benefits in kind" scheme operating between November 1991 and August 1994. Croxtons also ran a Restrictive Covenant Scheme utilising gold instead of fine wines.

•  THE BENEFITS  
• AVOIDS THE EMPLOYER’S 10% NATIONAL INSURANCE CONTRIBUTIONS  
• AVOIDS THE EMPLOYEE’S 10% NATIONAL INSURANCE CONTRIBUTIONS  
• RANKS AS A PENSIONABLE INCOME  
• OBTAINS CORPORATION TAX RELIEF  

The NIC avoidance is created because the payments are not treated as remuneration and earnings for Class 1 NIC purposes - confirmed
by leading Tax Counsel. The income tax PAYE provisions are now drawn so widely that such a liability is inevitable and consequently it is recommended that income tax should be accounted for under PAYE. The Company should be reimbursed such outlay within 30 days to avoid a further benefit in kind arising.

 Is in Fine Wines placed with a reputable company. Security of the monies is imperative.

a) Section 4 (4) Social Security Contributions Act 1992 treats as
earnings for NIC purposes any sum paid by the employer to or for the benefit of the employee in consideration of the granting of a restrictive undertaking which is taxable by virtue of S.313 TA88 EXCEPT valuable
consideration otherwise than in the form of money within Section 313 (4). Accordingly, where the consideration is in non cash form no NIC liability can arise. 

b) None of the measures introduced at Reg 19(5) ( which includes schedule
1 (A) SS (c) R (S.1. 1979/591) to combat NIC avoidance apply. This is because they seek to counter the established avoidance technique of providing earnings in the form of an excepted payment in kind.

 As Section 313 TA88 treats consideration for a restrictive covenant as an emolument of the employment it is considered that this source of income will rank as relevant earnings ( section 644 TA88) and as
pensionable earnings (Section 612 TA88)

a) The leading case concerning the tax deductibility of restrictive
covenant payments is Associated Portland Cement v Kerr ( 27 TC 103). In that case two directors accepted restrictive covenants shortly
before retirement by which they undertook not to compete with thecompany anywhere for life. As the Company had removed the risk of dangerous competition for life it was concluded that the payments
created an enduring benefit of the trade and so they were regarded as capital in nature and hence inadmissible. 
b) The restrictive covenant employed for the purposes of the scheme is deliberately short term. Consequently the vital ingredient of an enduring benefit is not created and the payment can only be viewed as revenue in nature. 
c) Providing the consideration is commensurate with the commercial value of the restrictive covenant then no risk to a tax deduction is foreseen.

In regards using the Restrictive Covenant Scheme the following shouldbe noted: 
1. The Company participating may be a trading or investment company.

2. It is not advisable to write a Restrictive Covenant for a Director who owns in excess of 70% of the company’s shares. 

3. If the Director wishes to obtain payment over a period of time
when the company can afford it arrangements may be made to purchase and obtain the wines over a period of years. 
4. If the Company has the suggested Restrictive Covenant already in force we shall be pleased to supply alternatives.

The wines are purchased through Magnum Fine Wines plc, with whom we have had a long and fruitful relationship since 1991 and who provided
the wines for the original GRAPEVINE SCHEME. 

Established in 1985, by professionals with a long history in the wine trade, they also have the expertise of an independent consultant, David Peppercorn, a master of wine since 1962 and the author on the definitive book on Bordeaux wines. 
Their Chairman , Alan Rayne, is most respected in the wine trade. Their offices are based at 43, Pall Mall, London, SW1Y 5JG. 
Their friendly and knowledgeable staff are available to take your
orders on 0171 930 6925 and their Fax number for documentation is 0171 321 0848. Monies should be transferred to their Clients Account
at Barclays Bank Plc, Hemel Hempstead, Herts HP1 1BX
( Sort Code 20-39-07.
Account No 90632732). 
They tell us they are looking forward to speaking to old friends and getting to know new ones.

Companies investing up to    £99,999 = 2% 

Companies investing    £100,000 - £499,999 = 1.5% 

Companies investing    £500,000 - £999,999 = 1.25% 

Companies investing over    £1 million = 1%
 
 
 
 
 
 
 

The above charges are free of  V.A.T as the wines are held in a U.K.Bonded warehouse. 

However there is a small extra charge to cover ocumentation,
insurance and storage of the wines. 

If professional advisers wish to have their fees added to the cost they should inform the amount when placing the order. 
They should also inform Magnum Fine Wines Plc how many recipients there will be & how much each is to receive. 
They should also make it clear as to whether the fees are to be included in the amount or added. 
The enclosed information is based on our interpretation of tax law.

A Company should seek confirmation from their own advisers. Croxtons Ltd. and the suppliers cannot accept responsibility for the information contained herein

                      E & O.E. 01/11/96

An Employer wishing to use Fine Wines as a consideration to pay an Employee for signing a Restricted Covenant should find it preferable to purchase wines which are stored in a Customs Controlled Bonded Warehouse for the following reasons:
 

1) The Wines will be registered in the 

 client’s own name.

2) They are secure and maintained in the correct conditions to matureproperly and improve with age.

3) Neither VAT or duty on wine kept or sold in a bonded warehouseis paid unless it is cleared for drinking.

4) It is simple to transfer the ownership of the Fine Wines to theEmployees without incurring stamp duty or VAT.
 

In order to acquire Fine Wines on this basis, we would recommend thefollowing process:

1) The Company purchases a number of cases of Fine Wines.
We have retained the services of a specialist Fine Wines consultancycalled  MAGNUM FINE WINES PLC, based in Pall Mall, London SW1 to carry out these transactions.

2) At a later date the Company holds a Board meeting whereby the Board Directors resolve to give  the Employee(s) by way of cases of Fine Wines consideration for signing a Restrictive Covenant.

3) The Employer writes to the Employee informing him of the board's decision to offer Fine wines in consideration of a Restrictive Covenant.
 

4) The Employee writes to the Employer agreeing   not to compete withthe Company within    ... miles of ............ within one year as a   Restrictive Covenant. 

5)  On receipt of this letter the Employer should complete an instruction to transfer ownership form authorising the transfer of ownership to the Employee.

6) Should the Employee wish to sell all or a number of his cases of wine he/she is perfectly at liberty to do so. This sale may be to other individuals, auctioneers or traders in Fine Wines including MAGNUM FINE WINES PLC. Should he/she decide to sell to MAGNUM FINE WINES PLC then a form authorising the sale and giving instructions as to the payment of the proceeds of sale should be signed.
The Example Documents numbered 1 - 6 are attached. N.B. Documents 1 and 5, the instruction to purchase and transfer forms, require authorised signatories.

Various documents covering the transactions will be issued by MAGNUM FINE WINES PLC, the proceeds of sale will normally be sent by CHAPS to any authorised bank account in the UK, within 48 hours of the completions of the transaction.
Employees may wish to keep some or all of their cases of wine either for drinking and/or as an investment and may do so. NO CAPITAL GAINS TAX is payable on the profit from wine as it is classified as a wasting asset.

The above information is based on our interpretation of the regulations.You may wish to seek confirmation from your own advisers. Croxtons Ltd and MAGNUM FINE WINES PLC cannot accept responsibility for the information contained herein. 
            E & OE November 1st 1996

    (to be completed on Company Headed paper)
To: Magnum Fine WinesPlc 
43 Pall Mall 
LONDON, 
SW1Y 6QU

From.

* Before filling this in, ask us the quantity of cases necessary for the amount required to be invested.

Held on Thursday 28th November 1996, 2 pm. at Headquarters, Principal
Avenue, Mainhead, Staffs.

Those present: 
Director 
Director 
Director 
Company Secretary
Having already bought a number of cases of Fine Wines in the name
of the Company it was agreed that it is prudent to arrange for certain
individual employees listed below to enter into a Restrictive 
Covenant so as to prevent the employee from competing within an 
area of 50 miles of ........ in a similar business for a period of time after
leaving the Company. The consideration for each employee to enter
into such a Restrictive Covenant could be the transfer of Company
assets & the Company Secretary is hereby authorised to arrange matters
for & behalf of the Company:

Employee             No. of Cases of fine wines as
Name                    detailed      on  MAGNUM 
--------                   FINE  WINES    Invoice 

(a)John Tonic  ..........................................................................

(b) Mary Gin       .........................................................................

 .
(c) Sarah Finlay        ..........................................................

(Specified Individual) was authorised to instruct MAGNUM FINE WINES
PLC to arrange for the transfer of the title to the aforementioned
fine wines to the employees listed above 
               There being no further business, the meeting closed

Date...........................
From : THE EMPLOYER 
To: THE EMPLOYEE

Dear ............................
The board of Directors have decided to offer to you ........................................ cases of wine in 
consideration of you signing a Restrictive Covenant not to compete with the Company within  .........  miles of ........... within one year of leaving the Company's employ. Once this has been completed, you have three options :
1. You can arrange for the wine to be delivered and drink it.
2. You may keep the wine as an investment.
3. At any time you can sell the wine. This can be through auctioneerssuch as Christie's or Sotherby's. 
Alternatively you may sell yourwine to any wine 
merchants including Magnum Fine Wines Plc.
We would be pleased to provide you further 
information should you
require it.

Date...................
From : THE EMPLOYEE 
To: THE EMPLOYER
Dear..................
Following our discussion about me not being able to compete in a similarbusiness in the event of my leaving the employ of the  Company, thefollowing is applicable :
In consideration of the company transferring to me .......... cases of fine wine, I undertake not to compete with the Company within  ........... miles of ...................... within one year of leaving the Company's employ or if one year be unlawfully long six months or if that be unlawfully long, three months.
Finally I agree if  I shall be in breach of this agreement I shall repay to you by way of liquidation damages the gross value of the fine wines received by me.

(Example Covenant)

Date ..............
To : Magnum Fine Wines Plc, 
43 Pall Mall, 
LONDON, SW1Y 5JG

From ........................................ (Employer)
Please transfer ownership of cases of Fine Wines to the undermentioned
persons listed below, in the amounts shown:

Name of Employee        Details as per   Number of cas es 
 ----                         invoice            as per invoice
a)

e)

f)

Signed

Signed 

                             INSTRUCTIONS TO SELL
Date ..............
To : Magnum Fine Wines Plc, 
43 Pall Mall,
LONDON, SW1Y 5JG

From ............................(Employee’s Name)
a) Please sell all the cases of Fine Wines owned by myself  and send the proceeds of sale to :

No of  Cases     Nameof Wine       as per invoice 

( Payments may be made direct to the Employees bank account. If required please complete the form  inserting the Bank, Sort Code, Address and
Account Number)

1. The following arrangements have been suggested as a means of making payments to employees without a liability to national insurance contributions (“NIC”). In consideration of a payment in, for instance, fine wines by the employer, the employee will give an undertaking that he will not disclose or publish any information and/or techniques used by the employer and will not divulge the details of any customer for
a period of , say, one year.

2. The first difficulty is that, as a matter of law, all contracts
of employment have an implied term that the employee will not disclose or make public any professional or trade secret or any confidential information which he learns by reason of his employment: Chitty on Contracts (27th ed 1994) paragraph 37-052. Therefore, it is difficult to see how an undertaking not to do something which the employee is already prohibited from doing could have any value.

3. The position is different after the termination of the employment. At that time the only implied term is that the ex-employee will not disclose the employer’s trade secrets : Faccenda Chicken-v- Fowler [1986] ICR 297. Therefore, there could be some value in a covenant not to disclose confidential information other than trade secrets. Alternatively, one could have a covenant not to compete with the ex-employer in a certain area within a certain time of the
termination of the employment.

4. My other concern is that an undertaking not to disclose confidential information while still employed might be remuneration derived from employment on general principles i.e. without reference to SSC & BA 1992 section 4 (4). TA 1988 section 313 was introduced to reverse Beak v Robson (1943) 25 TC 33. In Beak the taxpayer was paid £7,000 to enter into a covenant that he would not compete with his employer
within 50 miles of Newcastle after his employment was terminated. 
The House of Lords held that this payment was not an emolument from the taxpayer’s employment. Viscount Simon LC said, at 41 : “The sum of £7000 is not paid for anything in performing the service in respect of which Mr Robson is chargeable under Schedule E. The consideration which he has to give under the covenant is to be given not during the period of his employment but after its termination.”
 

It is similar to the payment for giving up right connected with the
employment in Hamblett - v- Godfrey (supra). It follows, in my opinion that payment would “derive from” the employee’s employment so as to be “earnings” as defined in SSC & BA 1992 section 3 (1)(a).

5. I would therefore advise that the employer ought to make its payment in return for a covenant that the employee will not compete within a certain area and during a certain period after the termination of the employee’s employment. 
There could also be added a covenant not to divulge confidential information which can be defined so as to be wider than trade secrets. Of course it must be possible to justify the size of the payment in relation to the objective value of the covenants given by the employee.

6. I agree that a payment in kind for a restrictive covenant will
not be deemed to be “earnings” by Virtue of SSC & BA 1992 section4  (4). This is because section 4 (4) only applies to payments which fall within TA 1988 section 313 ” otherwise than by virtue of sub-section (4) of that section”. Section 313(4) extends the charge under section 313 to the giving of valuable consideration other than for money and provides that sub-sections (1) to (3) are to have effect as if a sum
had instead been paid to the value of the consideration. It follows that without sub-section (4), section 313 construed without sub-section (4). as a result, the payments under the proposed transactions will not be deemed to be earnings by SSC & BA 1992 section 4 (4). therefore, it is irrelevant that the asset transferred is an asset which is taken out of the exemption for payments in kind by reg. 19(5) and Sch 1 A of the Social Security (Contributions) Regulations 1979.

7. For income tax purposes, the transaction clearly falls within TA1988 section 313. The assets will be “tradable assets” as defined in TA 1988 section 203F(2) and so PAYE must be applied.

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