Swingeing spin-off tax threat is lifted

February 18, 2005

Academics thinking of setting up spin-off companies breathed a sigh of relief this week as the threat of upfront multimillion-pound tax bills was removed.

The Inland Revenue has published fresh legislation to counter problems that arose from Schedule 22 of the Finance Act 2003. Under the Act, academics became liable for tax on their shareholdings in new companies.

UK universities had been spinning off up to 200 companies a year until the 2003 legislation. Afterwards, major enterprise universities such as Southampton and Oxford stopped setting up new companies. The University Companies Association calculated that 19 companies were set up in the full knowledge of Schedule 22 in 2003-04.

Despite trumpeting the Government's commitment to turn Britain into a knowledge economy fuelled by the exploitation of university research, Gordon Brown, the Chancellor, took more than a year to deal with the issue.

Jeremy Smith of Dickinson Dees, a law firm that advises university spin-off companies in the North East of England, said: "The Inland Revenue never intended the changes to affect academics. But the difficulties were not fully appreciated immediately, and the reaction was fairly slow. Nothing happened for a year."

He said the prospect of huge tax bills had deterred many academics from exploiting research.

The new legislation gives tax relief to those engaged in the creation of intellectual property in universities and not-for-profit organisations. This does not extend to other university staff involved, such as those in the technology-transfer office, who still cannot take an equity stake in a company they help set up without facing tax liabilities.

Philip Graham, executive director of the Association for University Research and Industry Links, welcomed the outcome. "Intensive lobbying by the sector has proved successful," he said. "The issue is more or less done and dusted. But how many missed opportunities (for new spin-offs) did we have?"

The original legislation was designed to stop wealthy companies making extra payments to their staff in the form of shareholdings rather than salaries. But the Inland Revenue did not appreciate that this would affect academics who receive an equity stake in their spin-off company from their university.

University spin-offs may have long development times before they have a product to trade. But as soon as an investor puts money into the company, it is assigned a market value and the academic would become liable for tax on this nominal value of his or her shareholding.

The changes will be backdated to December 4, 2004, and will be presented to Parliament in the 2005 Finance Act.


* Biotechnology spin-offs are hopeful that it will become easier to raise new investment after a report on pre-emption rights by Paul Myners, chairman of Marks & Spencer Group, for the Department of Trade and Industry.

Pre-emption rights give existing shareholders first refusal of new share issues, but they have been blamed for lengthening the time it takes to raise money. Companies in a fast-moving field need to be able to raise funds quickly.

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