ERSM100300 - University Spin-outs

Spin-outs created before 2 December 2004: overview

On the 14 April 2004 a Memorandum of Understanding was agreed between the Universities Companies Association (UNICO) and HMRC setting out a method of dealing with academics’ shares which did not involve an up-front tax charge. A copy of this MoU is given in ERSM100340.

FA05/S21 (Finance Act 2005) contained special rules for spin-out companies where both the date of acquisition of the shares and the date on which the IP transfer agreement was made were before 2 December 2004.

As well as satisfying the general conditions for relief (see ERSM100070),the employer and employee must have jointly elected no later than 15 October 2005 if they want the special treatment to apply.

The election is irrevocable and the effect is that

  • the value of the IP transferred is ignored when the Researcher acquires shares or when the IP is transferred after shares have already been acquired, as appropriate; and
  • there is instead an Income Tax charge, either when the shares are sold or, if earlier, on a date specified by both parties in a further joint election.

The taxable amount is the market value of the shares immediately before the chargeable event (i.e. sale or elected date), less

  • anything paid by the Researcher to obtain the shares
  • any amount on which Income Tax has already been paid, either when the shares were acquired or on a subsequent chargeable event, and
  • (on a disposal of the shares only) any disposal expenses incurred by the shareholder.

These deductions are set out in section 21(6) of Finance Act 2005.

This treatment gives participants the opportunity to elect, in broad terms, for similar taxation treatment as if they had used a structure on the lines of that set out in the Memorandum of Understanding (ERSM100340).

A copy of the approved section 21 election form is available here