Chapter ERSM100340
| Published date | 18 May 2016 |
| Record Number | ERSM100340 |
| Court | HM Revenue & Customs |
| Issuer | HM Revenue & Customs |
1.1 University spin-outs are complex commercial arrangements, designed to deliver anumber of different commercial and public objectives. These vary from requiring university employees (usually academics, and therefore referred to in this memorandum as the Academics) to risk their own money by buying shares, to rewarding those employees under the university’s Intellectual Property Sharing Policy.
1.2 Any shares acquired by the Academics will be acquired in connection with their employment and will be covered by the income tax rules dealing with “employment-related securities”. However, that fact alone will not, of itself, mean that income tax or National Insurance Contributions (NICs) will arise.
1.3 When the Academics acquire the employment-related securities they may do so wholly as an investment; wholly as a reward for services; or as a combination of both. In the latter case, the correct identification of the divide between the two will dictate when, and in what amount, income tax and NICs arise – drawing a distinction between capital investment and revenue reward.
Introduction2.1 This memorandum follows discussions between UNICO and the Inland Revenue with regard to the tax treatment of the Academics who acquire shares in spin-out companies, following the Finance Act 2003.
2.2 This memorandum describes a shareholding structure which meets UNICO’s objectives to:
- give the Academics shareholder status from the outset;
- ensure that the Academics do not have to pay significant tax or NIC charges, until they cash-in their shares; and
- produce predictable tax and NIC consequences.
2.3 The approach set out in this memorandum is a “safe harbour” which, if applied, will give certainty of tax treatment. It does not affect the right of any taxpayer to argue that a different interpretation should apply to his or her specific circumstances.
2.4 The structure is based on the Academics holding convertible preference shares conferring some or all of the rights - and being subject to some or all of the restrictions - set out in paragraph 3 below. Paragraph 4 sets out the agreed tax treatment of such shares.
2.5 The Inland Revenue will not be bound by this memorandum:
- if the main purpose, or a significant purpose, of the arrangements is avoidance of liability to tax or NICs, or
- to the extent that there are material deviations from the structure described below.
In these circumstances the Inland Revenue reserves the right to consider the application of all provisions relating to tax and NICs, including Chapters 1 to 5, Part 7,ITEPA 2003.
2.6 All statutory references in this paper are to the Income Tax (Earnings and Pensions)Act 2003 as amended by the Finance Act 2003 unless otherwise stated.
3.1 The preference shares shall confer some or all of the following rights:
- The right, at any time, to convert into ordinary shares on a one-for-one basis. While a further payment on...
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