188体育

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 (拢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 拢30. Each share is now worth 拢1,000. The relief for each researcher is shown in this computation:

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

Outcome

The market value of Thomas鈥檚 and More鈥檚 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 拢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 鈥� 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 拢1 shares at market value of 拢50. Sometime later, after deciding that the invention is not yet developed sufficiently to licence, the University transfers the existing IP, worth 拢7,000, to the spin-out and takes 20 x 拢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 拢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 拢100 = 拢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 拢1 each) and there would therefore be no benefit to charge under Chapter 4.

Example 3: Plato 鈥� subsequent introduction of IP

Once the IP is in place, negotiations are concluded with venture capitalists. They introduce funds of 拢50,000 and subscribe for new shares at their market value. They consider this to be 拢1,000 per share, taking account of the value of the company complete with Plato, business plan, IP, and 拢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 拢1 shares.

The increase in value of Plato鈥檚 shares to 拢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.