What is the interaction with Income Tax provisions?
Part 7 of ITEPA provides rules for the taxation of employment-related shares and securities. It aims to ensure that value or benefits that flow to employees through or from share-based remuneration are treated in the same way as value that flows in the form of cash or other kinds of benefit.
In the context of a spin-out, this means that where
- a researcher was or is employed by the Research Institution (RI) and acquires shares in a spin-out and
- the RI puts value into the spin-out company by transferring Intellectual Property (IP) into it
then a charge to Income Tax and National Insurance contributions (NICs) could arise under either:
- Chapter 4 of Part 7 (because there is an increase in value of existing shares held by a researcher), or
- Chapter 3C (because shares reflecting the value of IP are acquired by a researcher at undervalue).
This charge would be based on current values when the shares are acquired or the IP is transferred, and there would be no relief against income were the spin-out company to fail later on and the IP to revert to the RI.
The Income Tax due would be paid under PAYE together with Employer’s and Employee’s NICs if the shares are readily convertible assets (guidance to be published in ERSM170000 et seq in due course). The primary responsibility for payment would usually rest with the RI, although the spin-out company itself could also be liable.
However, the new treatment described below prevents an Income Tax and NICs charge from arising under these circumstances.