London

All quiet: attempts to close a tax loophole have slowed activity at places such as Oxford Science Park. Credit: OXFORD SCIENCE PARK

The creation of spin-off companies at British universities has fallen dramatically over the past six months because of a change in the tax laws, Nature has established.

The country's top universities typically each launch five to ten new companies every year. But the four highest-ranked research institutions — University College London, Imperial College London and the universities of Oxford and Cambridge — have created just six spin-offs between them since last August, when the new rules came into force.

The spin-offs have dried up, university officials say, because the tax laws now require directors to pay hefty taxes on the estimated value of shares they hold in a company within a year of its foundation. The rule was meant to close a tax loophole used by wealthy business executives — but it has had the unintended effect of making scientists think twice about starting a business venture.

“The rules have had a devastating effect,” says Tom Hockaday, executive director of Isis Innovation, the University of Oxford's technology-transfer company. “They're killing what they say they want to create.”

Sue Sundstrom, director of life sciences at the University of Southampton's Centre for Enterprise and Innovation, says the tax bill is “completely insane” given that government ministers are always calling on universities to do more to create wealth.

The drought might ease soon, because university technology-transfer officers and tax officials have agreed on a fresh interpretation of the law. But university officials caution that the revised interpretation will pose further problems for academics, and won't guarantee a full revival of spin-off activity.

In the revised arrangement, researchers can defer paying taxes by taking ‘convertible preference’ shares, which are subject to tax only at the time they are sold.

Technology-transfer officers say the change may encourage some academics to start launching companies again, but that it will expose them to even higher tax rates — of up to 48% — when they sell their shares.

A spokesman for the Inland Revenue, which helped draft the tax laws and negotiated the new arrangements with universities, said he recognized that there “had been a period of uncertainty” but that the revision should help universities meet commercial goals without creating tax problems for academics. He declined to comment on whether the higher tax burden would eventually be removed.