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HMRC internal manual

Employment Related Securities Manual

HM Revenue & Customs
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University Spin-outs

Effect of funding injections

The funding of a company may increase the value of all its shares. This increase is not relieved by the provisions of Chapter 4A, which only apply to increases in value occasioned by the introduction of intellectual property (IP) into the spin-out company.

However, where the funding takes place at the same time as the IP is put in and shares are issued to the Research Institution (RI) and researchers, HMRC will accept that it was put in after the shares were issued and that its value is not reflected in the shares at the time of issue.

Example 17

IP is transferred into a shell company set up by the person involved in research, or the researcher acquires shares for their nominal value in a company containing only IP, set up by the RI. Funding will not be fully committed until after both researcher and institution are signed up.


In both cases the IP transferred is the only factor affecting or potentially affecting the value of the shares and Chapter 4A will be able to wholly relieve this. In the unique combination of circumstances applying to spin-outs HMRC will not take the point that potential funding could be taken into account.

Example 18

A spin-out is set up with one document in which it is agreed that the IP will be transferred, shares will be acquired by each party, and funding will be invested by a third party all on the same day.


In the unique combination of circumstances applying to spin-outs HMRC will not take the point that potential funding could be taken into account.

Example 19

A university has an established pattern of setting up spin-outs via its own intermediate company, usually using its own internal seed fund. Negotiations to set-up a spin-out, and allocation of shares, will be in the knowledge that seed fund investment is highly probable, even though at the time when the researcher acquires his shares it has not been irrevocably committed.


Until funding is legally committed HMRC will not take the point that the expectation should be taken into account.

Example 20

Samuel and Butler are researchers at the University of Erewhon. They have been conducting research into the development of new machines. When it looks like there may be a commercial application, the University decides to set up a spin-out company to develop it further. Venture capitalists are willing to invest £50,000 for a 50% stake in the venture; the University will licence the IP in return for a 25% stake; and Samuel and Butler will receive shares in the venture, in return for a payment of £25, and the waiver of their rights under the IP sharing agreement. The shares are acquired by Samuel and Butler for £25. There are three scenarios:


If the shares are acquired before the funding is provided by the venture capitalists then there will be no liability, as the company will have only a nominal value, ignoring the value consequent on transferring the IP.

However, if the shares are acquired after the funding has been provided, or after other business development that could affect the share value has taken place, then the shares may have a considerable value and there could be a charge to tax and NICs, even having ignored the effect on value of the IP transfer to the company.

The third scenario would involve a three-way transaction effected on the same day:

  • University of Erewhon licences IP in return for 25% of shares in the spin-out
  • Samuel and Butler pay £25 and waive their interest in the IP-sharing agreement in return for 25% of shares in the spin-out.
  • Venture capitalist pays £50,000 in return for 50% of shares in the spin-out.

HMRC accepts that the simultaneous funding has no effect on the value of Samuel’s and Butler’s shares and ITEPA03/S452 exempts them from any charge on the value generated by licensing the IP.