Tax row stymies spin-off activities

October 1, 2004

University spin-off activities could grind to a halt as attempts to resolve an ongoing dispute over tax reached an impasse this week.

Encouraging technology transfer and university enterprise has long been a priority for the Government but its 2003 Finance Act is deterring academics from setting up companies to commercialise their research.

The problem is associated with Schedule 22 of the Act and arises from the taxing of benefits from employers. It means that academics could face huge tax bills on the shares they hold in spin-off companies before the firms have generated a single penny.

Since the Act was passed 18 months ago, some universities have stopped spinning off companies, and those involved in business-link activities fear further delays could jeopardise academic enterprise.

The Inland Revenue has admitted that there is a problem but said this week that there was no solution under current law and that legislation would have to be drafted by the Treasury to resolve the issue.

Tom Hockaday, director of Isis Innovations, said Oxford University had not spun off a single company between August 2003 and June 2004.

"We would expect to create seven or eight companies a year," he said. "By far the most important factor is Schedule 22. Researchers were scared of getting involved with commercial ventures that may lead to an instant tax bill."

University enterprise groups have been pressing the Inland Revenue and the Department for Trade and Treasury to find a solution.

Philip Graham, executive director of the Association for University Research and Industry Links (Auril), described the problem with Schedule 22 as the "valuation of something before anyone sees any dosh". He said: "We had been trying to reach a negotiated settlement, which would be a lot better for the sector than having something imposed on us.

"Bearing in mind that universities have stopped spinning off companies because of the uncertainty over the tax situation, what (the Inland Revenue) has said will stifle a lot of entrepreneurship and spin-off activity."

Janice Cross from the Inland Revenue is due to speak at Auril's annual conference in Dublin next week.

The catch in schedule 22

When a university spins off a company, the academic who did the original research generally receives shares in the company, say 40 per cent.

A problem exists because the Finance Act 2003 makes shareholders liable for tax on the value of their shares as with any benefit from an employer, whether the company is generating an income or not.

Under the terms of the Act, a spin-off is given a value as soon as an investor puts money into it, even if it is in development.

For example, if £250,000 is invested in return for a 10 per cent stake of shares, the company would be valued at £2.5 million. This, in turn, would mean that the academic with 40 per cent of the shares would be considered to have a £1 million stake and would be taxed at 48 per cent on this amount.

Under Schedule 22, the fact that the academic is yet to see a penny is irrelevant. Non-academic shareholders are taxed under a different regime at 10 per cent, creating more tensions even if the company were to turn a profit.

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