ERSM100110 - University Spin-outs

Setting up a spin-out

Example 1 cont.: Thomas & More - transfer of IP before shares acquired

Looking again at Example 1 (ERSM100040), researchers at the University of Utopia, Thomas and More, have been conducting research in a specialist area. The University decides to set up a spin-out company to develop the research further. It subscribes for 20 shares in the new company at par (£20). The University then transfers the IP as it stands into the spin-out company, with a proviso that it reverts to the University if further development is not fruitful. A further 30 shares are allocated to Thomas and More for which they pay £30. Each share is now worth £1,000. The relief for each researcher is shown in this computation:

  • Value of shares received 15 x £1,000 = £15,000
  • Payment for shares - (15)
  • Potential charge on undervalue £14,985
  • Spin-out relief - effect of IP - (£14,985)
  • Liability - nil

Outcome

The market value of Thomas바카라 사이트™s and More바카라 사이트™s shares when they acquire them is calculated disregarding the transfer of IP from Utopia University. Without this factor, there is no appreciable difference between the £30 paid for the shares and their market value and no charge to Income Tax or NICs arise under Part 7 of ITEPA.

Example 2: Republic University 바카라 사이트“ shares issued before IP transfer

Plato is a researcher at the Republic University. He sets up a spin-out company himself, paying for an initial 50 x £1 shares at market value of £50. Sometime later, after deciding that the invention is not yet developed sufficiently to licence, the University transfers the existing IP, worth £7,000, to the spin-out and takes 20 x £1 shares. Plato waives any rights he may have under an IP-sharing agreement with Republic University.

At this time there will be an increase in value of £100 each in the original shares. This would potentially render Plato liable to a charge under Chapter 4 of Part 7 of ITEPA on 50x £100 = £5,000.

Outcome

If, on or after 2 December 2004, there is either

  • the acquisition of shares, or
  • the transfer of IP,

the shares would be valued for Chapter 4 purposes as if the IP had not been transferred (i.e. shares would be treated as worth only a nominal £1 each) and there would therefore be no benefit to charge under Chapter 4.

Example 3: Plato 바카라 사이트“ subsequent introduction of IP

Once the IP is in place, negotiations are concluded with venture capitalists. They introduce funds of £50,000 and subscribe for new shares at their market value. They consider this to be £1,000 per share, taking account of the value of the company complete with Plato, business plan, IP, and £50,000 funding. So they receive 50 shares in return for their funds and the issued share capital of the spin-out company is 120 x £1 shares.

The increase in value of Plato바카라 사이트™s shares to £1,000 each as a result of the funding support obtained will be a normal commercial increase in value and will not therefore be chargeable under Chapter 4 of Part 7 of ITEPA. The benefit has not been passed to him by his employer as it was when the IP was transferred.