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HMRC internal manual

Employment Related Securities Manual

University Spin-outs

Spin-outs created before 2 December 2004: examples

Example 11 - old-style arrangements

In August 2003 a spin-out was set up between the University of Braniacs and two of their researchers, Einstein & Newton, without considering the effect of the FA 2003 changes. The University transferred its IP to the spin-out in April 2004 and, later on, funding is secured when the potential product has developed a little more. No more thought is given to the potential charge under Part 7 of ITEPA until publicity before the Pre-Budget Report in late 2004. The researchers are still considering what to do in March 2005 when the legislation for pre-2 December 2004 spin-outs is announced.

Einstein & Newton must consider the likely value of the IP that was transferred to judge the IT/NIC liability that arose in April 2004 under the law as it existed then. Both think the IP would have had a considerable value as there had been discussions about licensing instead to a third party. They have until 15 October 2005 to elect for Section 21 of the Finance Act 2005 to apply.


Einstein decides to accept the up-front charge to IT/NICs that arose on the transfer of the IP in April 2004, so that if and when the spin-out is successful his liability will be to Capital Gains Tax only.

Newton is not so confident that the spin-out will be a success. He elects under Section 21 for the increase in the market value on the transfer in April 2004 to be ignored for IT purposes. If the spin-out is not a success, he intends to elect for the chargeable event under Section 21(4)(b) to be calculated when the shares are worthless. But if it is a success the whole sale proceeds will be liable to Income Tax and NICs, subject to any allowable deductions under Section 21(6), unless he elects for liability to be calculated at an earlier date.