New UK Tax Rules Hamper Commercialisation Of Academic Research

by Robert Lee, Tax-News.com, London

06 July 2004

The recent introduction of new tax rules is impeding the ability of British universities to create new high-tech ventures and has undone much of the government’s work to encourage investment in new technology start-ups, the Financial Times has reported.

The issue stems from changes to income tax rules affecting shareholders in university spin-off ventures.

Prior to July 2003, academics who took a stake in firms established by their university to commercialise research would be liable only for capital gains tax, which could be reduced to as little as 10% after the application of taper relief.

However, under changes brought about in last July’s Finance Act, investors instead have to pay income tax, which means charges often occur before the academic has a chance to sell his or her stake.

According to the Financial Times, academics at Oxford and Exeter Universities have reported a sharp drop in the number of spin-off firms that have been established since the tax changes.

"It is ironic this has happened when the government has done so much to stimulate spin-outs. We had been doing eight a year, but since [the reforms] we have only done two," Tim Cook, chief executive of Isis Innovation, the private technology arm of Oxford University, told the FT.

Meanwhile Exeter University has established no new ventures since the changes were made, whereas in the twelve months prior to July 2003, the institution created five spin-off companies.

"The tax changes are not a death knell for university spin-outs, but if you want to create robust spin-outs you need the academics to be involved,” observed Exeter’s innovation manager, Robin Jackson.

“That is very difficult under the Finance Act,” he added.

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