University Spin-out Companies

– in the House of Lords at 2:30 pm on 11th November 2003.

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Photo of Baroness Wilcox Baroness Wilcox Conservative 2:30 pm, 11th November 2003

asked Her Majesty's Government:

What effect the tax legislation introduced in the Finance Act 2003 will have on the development of "spin-out companies" in Britain's universities.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Parliamentary Under-Secretary, Department for Culture, Media & Sport, Parliamentary Under-Secretary (Department for Culture, Media and Sport) (Media and Heritage)

My Lords, I understand that concerns have been raised with the Inland Revenue about the effect of Schedule 22 of the Finance Act 2003 on university spin-out companies. Officials met with UNICO, a professional association of university companies, in July to discuss and clarify the application of the new rules. UNICO has recently submitted a case study to the Inland Revenue. That will form the basis for negotiations, which will allow the correct tax treatment for spin-out companies to be agreed.

Photo of Baroness Wilcox Baroness Wilcox Conservative

My Lords, I thank the Minister for that Answer. Does he agree that, as it stands, this tax measure is a massive discriminatory disincentive for our bright university innovators?

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Parliamentary Under-Secretary, Department for Culture, Media & Sport, Parliamentary Under-Secretary (Department for Culture, Media and Sport) (Media and Heritage)

No, my Lords, far from it. Schedule 22 is a very necessary tax reform. It has to deal with a problem which in the past tax year amounted to no less than £1.4 billion of tax forgone. I believe that the analogy the noble Baroness, Lady Wilcox, would want me to make is with venture capital. The British Venture Capital Association has been involved in exactly the same negotiations as those we are now entering into with university spin-out companies. We have two memoranda of understanding, which I believe entirely satisfy the points raised by the Venture Capital Association. I am sure that we can do the same for university spin-out.

Photo of Baroness Warwick of Undercliffe Baroness Warwick of Undercliffe Labour

My Lords, I declare an interest as chief executive of Universities UK. Is the Minister aware that the Lambert's Review Summary of Emerging Issues states:

"The number of spinouts in the UK has been increasing rapidly in the last five years, and is now higher than in both the US and Canada, as a proportion of research expenditure"?

Does the Minister share my concern that the complexity of legislation in this area may increase the costs of professional tax advice and undermine this excellent record of collaboration?

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Parliamentary Under-Secretary, Department for Culture, Media & Sport, Parliamentary Under-Secretary (Department for Culture, Media and Sport) (Media and Heritage)

My Lords, I am very glad to agree with the noble Baroness, Lady Warwick, about the excellent reputation of university spin-out companies in this country and the fact that they are so successful. I am afraid that tax complexities exist with or without Schedule 22. The case study submitted by UNICO to the Inland Revenue, to which I referred in my Answer, is three inches thick—I wish it were not so—but it is not caused by Schedule 22.

Photo of Lady Saltoun of Abernethy Lady Saltoun of Abernethy Crossbench

My Lords, what are spin-out companies?

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Parliamentary Under-Secretary, Department for Culture, Media & Sport, Parliamentary Under-Secretary (Department for Culture, Media and Sport) (Media and Heritage)

My Lords, when universities or any educational institution—there are examples of schools doing this—have ideas which are capable of exploitation in the market, they set up spin-out companies to exploit such ideas and capabilities.

Photo of Lord Skelmersdale Lord Skelmersdale Conservative

My Lords, at the risk of displaying my ignorance, are not universities, like schools, charities? Therefore, is it not in order for the spin-out companies to covenant their profits tax free to the charity?

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Parliamentary Under-Secretary, Department for Culture, Media & Sport, Parliamentary Under-Secretary (Department for Culture, Media and Sport) (Media and Heritage)

My Lords, spin-out companies are not charities. It is in order for them to do what they like with their surpluses or profits according to how they are set up.

Photo of Baroness Noakes Baroness Noakes Conservative

My Lords, it is encouraging that the Revenue is considering this issue with the university sector. Does the Minister agree that the law of unintended consequences was at work and it was not the Government's intention to tax those involved in university spin-out companies? Will he give an undertaking that the Government will reverse their mistake?

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Parliamentary Under-Secretary, Department for Culture, Media & Sport, Parliamentary Under-Secretary (Department for Culture, Media and Sport) (Media and Heritage)

My Lords, I am very glad to welcome the noble Baroness, Lady Noakes, to her position and express my sorrow that the noble Lord, Lord Saatchi, is not facing me again. However, I do the best I can with what material is to hand.

Schedule 22 will work both ways. The purpose behind it is to ensure that the value gained from capital growth is not subject to income tax and national insurance contributions while at the same time ensuring that the value gained by reason of employment, including securities as part of a remuneration package, is subject to income tax and national insurance contributions. That was not clear; Schedule 22 makes it clear, and there is nothing to apologise for.