REV BN 04: Research Institution Spinout Companies

Who is likely to be affected?

1. Employees of Research Institutions (RI) who acquire or have acquired employment-related shares in spinout companies into which the RI transfers Intellectual Property (IP). As the nature of the IP can be very wide-ranging it is unlikely it will favour or impact on a particular business sector/activity. Given the nature and purpose of spinout companies, it is most likely that the spinout companies affected will be small in size, with less than 50 employees.

General description of the measure

2. Universities, public-sector research establishments (PSREs) and entities such as NHS Trusts and The Ministry of Defence own IP created by their employees. Such entities have unique IP sharing policies (sometimes called “employee incentive or compensation schemes”) that allow researchers, who have helped create the IP, to benefit when it is subsequently exploited.

3. The form and timing of this reward varies. It may be cash representing a share of royalties received by the institution from licensing or selling the IP. Alternatively, it could be a transfer of value to researchers via their ownership of shares in a spinout company set up to further develop the IP to the point where it
can be exploited commercially.

4. Whatever form the reward takes it is subject to PAYE and National Insurance Contributions (NICs) at the time it flows to the employee. Where shares are concerned, this point can be very early on in the life of a spinout, and it can be difficult to value the extent of the reward, leading to difficulties in payment of tax and NICs. This uncertainty has had a negative impact on the creation of new spinout companies. This measure will help to provide the flexibility the sector needs to resume spinout activity by ignoring the value of the IP on transfer to the spinout company.

5. For spinouts that were set up before the operative date, there will be an opportunity to elect that income tax and NICs liabilities will not be payable unless and until the company is successful.

Operative date

6. The main legislation will be effective from 2 December 2004. Spinouts set up before that date who wish to elect for the charge to income tax and NIC to be calculated at a later date must do so no later than 15 October 2005.

Current law and proposed revisions

7. The Finance Act 2003 reform of the taxation of employee share remuneration brought the tax treatment of this employment reward into sharp focus and created uncertainty for spinouts. This contributed to a significant reduction in the number of new spinouts. Legislation will be introduced to remove this uncertainty and allow universities and other PSREs to make decisions on the formation and structuring of spinouts based on commercial factors rather than on the basis of the tax consequences of certain company structures.

8. The legislation will disregard the value of the IP on transfer from the research institution to the spinout company for the purpose of the rules that tax employment-related securities held by researchers, thereby removing the barrier to spinouts posed by a tax charge at the time of the transfer.

Further advice

9. If you have any questions about this Note, please contact Hasmukh Dodia on 020 7147 2839. A Final Regulatory Impact Assessment (RIA) and a summary of the Consultation Representations on this measure have been published today. These and information about other Budget measures are available on the Inland Revenue website

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