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In the period between the enactment of FA 2003, Sch 22 and the 2004 Pre-Budget report, the Revenue came to a number of agreements with research institutions to deal with the problems caused by FA 2003, Sch 22. These became formalised in a memorandum of understanding (MOU)¹. Spin-outs created using the MOU rules were able to defer the tax and NICs charge to the point when the company was successful. Provisions introduced by FA 2005² offered similar opportunities to those research institutions created before 2 December 2004 which did not take advantage of the memorandum of understanding.

The FA 2005 provisions apply in circumstances where all of the provisions of ITEPA 2003, ss 451–460 (Pt 7, Ch 4A), other than the commencement provisions (see E4.508AA), are satisfied³. In other words the shares must have been acquired, and the intellectual property transferred, before 2 December 2004. In these circumstances, employees are given the choice of being taxed under the general rules (ie as if the shares in