Budget 2005 highlights importance of intellectual property for spin-out companies
The 2005 budget has highlighted the importance of developing intellectual property rights (IPR) for economic growth. Organisations such as universities, public sector research establishments, the NHS and some charities are just some of the entities which own IPR created by their employees. These organisations often have "IPR sharing policies" which are used to reward employees who have created IPR, particularly if this is subsequently commercially exploited.
As indicated in the law-now article 'University spin-out companies' dated 9.12.2004, as a result of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) there was a significant reduction in the creation of spin-out companies set up to develop and exploit a scientific discovery. This was primarily due to the fact that the value of shares in the spin-out company held by the researcher creating the IPR could be increased by an agreement to transfer the IPR into the spin-out company. Consequently, a tax charge could arise on the acquisition of the shares or upon receipt of a benefit in connection with the shares under the provisions of ITEPA. Such a tax charge was likely to arise before the money was available to meet the bill (and irrespective of whether the spin-out was successful so that the researcher actually made a gain). As a result the proposition of creating a spin-out company was unattractive and resulted in a dramatic reduction in the number of companies being created.
In the Finance Act, legislation will be introduced which is intended to allow universities and other such organisations to make decisions on formation and structure of spin-out companies based on commercial factors as opposed to tax consequences. The new legislation follows on from the Inland Revenue consultation announced in the pre-budget report on 2 December 2004.
The new legislation will disregard the value of the IPR on transfer from the research institution to the spin-out company provided the detailed tests set out in the legislation are satisfied. As a result, there will be no up front income tax or national insurance contributions resulting from the transfer of the IPR. However, there may still be upfront income tax and national insurance charges for researchers who pay less than an investor for shares in the spin-out company, to the extent that the difference in value is not attributable to the value of the IPR. Also, there will generally be capital gains tax if and when the researcher subsequently sells their shares at a gain. This legislation was effective from 2 December 2004, however researchers who acquired shares in spin-out companies set up prior to that date can, in some circumstances, make a joint election with the employing spin-out company to defer a charge to income tax and national insurance contributions arising from a researcher's acquisition of shares in a spin-out. Any such election must be made prior to 15 October 2005.
For further information about spin-outs, please contact Sarah Hanson on +44(0) 207 367 2559 or sarah.hanson@cmck.com or Aasim Qureshi on +44(0) 207 367 3620 or aasim.qureshi@cmck.com or Nick Beckett on +44(0) 207 367 2490 or nick.beckett@cmck.com. For further information about the tax implications of spin-outs, please contact Alison Hughes on +44(0) 207 367 2862 or alison.hughes@cmck.com
