A university spin-out’s IP agreement is also an accounting document. The upfront fee, the milestone payments, the running royalty and the shares-for-IP transfer each hit the P&L and balance sheet differently. This page sets out how to account for each under FRS 102, what sits on the balance sheet as an intangible, and how the R&D tax relief rules apply when the university does the research.
| Route | What the company gets | What the university gets |
|---|---|---|
| Assignment | Full legal ownership of the IP | Equity, upfront payment, or both |
| Exclusive licence | Exclusive right to use and commercialise in a defined field | Equity, upfront fee, milestones, running royalty |
| Non-exclusive licence | Right to use alongside other licensees | Usually royalty-weighted, less equity |
| Equity-for-IP | Assignment or exclusive licence in return for shares at par | Equity only; the stake IS the payment |
The commercial trade-off: a university that takes a smaller equity stake usually takes a running royalty on sales to compensate. One that takes equity only usually negotiates a larger stake. The USIT guides frame the equity range (10–25% for life sciences, 5–10% for software); the royalty rate is case by case.
FRS 102 Section 18 (Intangible Assets other than Goodwill) applies to acquired intangibles that are separately identifiable, controlled by the entity, and expected to generate future economic benefits. An exclusive IP licence meets the definition.
The intangible is recognised at cost: upfront fee + any directly attributable costs of acquiring it (legal fees, due diligence costs). Shares issued to the university as consideration are measured at fair value — which at incorporation of a pre-revenue spin-out is usually at or close to par.
Example journal (illustrative; adapt to your chart of accounts):
FRS 102 requires intangibles with a finite useful life to be amortised over that life. For patented IP, the useful life is typically the shorter of the patent’s remaining term and the period of expected commercial benefit. Default assumption in the absence of a reliable estimate: 10 years, straight-line.
Amortisation runs through the P&L as a non-cash charge. It is not deductible for Corporation Tax under the standard corporate intangibles regime for IP created or acquired after 1 July 2020 from a related party unless the “corporate intangibles” conditions apply — this needs case-by-case review (CTA 2009 Part 8).
Review for impairment at each reporting date if there is any indicator (failed milestone, superseded tech, loss of key licensee). Write down to recoverable amount.
Milestone payments are typically contingent — triggered by regulatory approval, a sales threshold, or a technical event. Under FRS 102, a contingent payment is not recognised as part of the cost of the intangible at acquisition if it is contingent on future events. It is recognised when:
When recognised, the usual treatment is to add it to the cost of the intangible and amortise over the remaining useful life. If the milestone is tied to a specific product launch, the useful life may be re-assessed.
Running royalties on sales are an operating expense of the period in which the related sales are recognised. They sit in cost of sales (if they relate to units sold) or in administrative expenses, depending on the royalty’s economic character.
Journal:
Royalties are a tax-deductible operating expense under normal Corporation Tax principles.
Shares issued to the university in exchange for the IP are a share-issue transaction, not a cash transaction. For the company, the shares are issued at the fair value of the IP transferred. For the university, this may be a disposal of IP for CGT purposes.
For the founders’ shares subscribed at par alongside the university’s shares at par, the employment-related securities rules apply: if the shares are considered acquired for less than their unrestricted market value, the undervalue is taxable as employment income unless a section 431 election is filed within 14 days. The usual protection is to subscribe for founder shares before the IP enters the company (when the company has no assets, so the shares are worth their nominal value) and file a section 431 election anyway as a belt-and-braces measure. The spoke on spin-out equity covers this in detail.
Under the merged R&D scheme (accounting periods beginning on or after 1 April 2024), a UK company gets a 20% R&D expenditure credit (RDEC) on qualifying expenditure. Loss-making R&D-intensive SMEs (where qualifying R&D is 30% or more of total expenditure) get an enhanced rate under the ERIS scheme.
For a spin-out that contracts R&D out to the university, the key questions are:
Document the R&D in a technical narrative at the time, not retrospectively, and keep the subcontract agreement as supporting evidence. Our R&D tax credits founders’ guide (2026/27) covers the mechanics.
The corporate intangibles regime (CTA 2009 Part 8) gives tax deductions for amortisation and impairment of qualifying intangible assets. Important restrictions apply where the IP is acquired from a related party:
A UK university is a related party only if the university or its connected entity holds >25% of the spin-out’s shares, or there is other common control. Most USIT-aligned spin-outs have the university at 5–25% equity, which can sit right on the related-party line. Needs case-by-case review.
| Item | Where | Typical magnitude |
|---|---|---|
| Intangible asset — IP licence | Non-current assets | £0 to £500,000 depending on upfront fee |
| Share capital (founders + university) | Equity | Nominal (£100–£1,000) |
| Share premium (if advance subscription converted) | Equity | Round size minus nominal |
| Accrued royalties | Current liabilities | Zero if no sales yet |
| R&D tax credit receivable | Current assets | Depends on qualifying spend |
| Deferred grant income | Current / non-current liabilities | If Innovate UK or similar grant received |
Not the licence fee itself — a licence to use existing IP is not R&D. But subcontracted R&D work paid to the university on an ongoing basis is qualifying under the merged scheme, with a 100% inclusion rate (not the 65% restriction that applies to unconnected subcontractors).
Yes, under FRS 102 Section 18. It is recognised as an intangible asset at cost and amortised over its useful life.
For the company, when probable and measurable, they add to the cost of the intangible and are amortised. The tax deduction depends on whether the asset is inside the corporate intangibles regime. For the university, milestone receipts are usually trading income.
Not if the founders subscribed before the IP entered the company (so the shares were worth their nominal value) and a section 431 election was filed within 14 days. Without those steps, the discount from unrestricted market value is taxed as employment income — potentially 45% plus NI.
Ten years straight-line is a common default where no reliable life can be estimated. The actual life is the shorter of the patent term, the exclusive-licence period, and the expected commercial-benefit period. For a drug under 20-year patent protection with 12 years remaining at licence date, 12 years is more appropriate. Document the judgement.
Official guidance: FRS 102, HMRC Corporate Intangibles Research and Development Manual, R&D tax relief. AccTek is independent of HMRC and GOV.UK.
Related: university spin-outs and student startups (hub) | spin-out equity & cap table | SEIS/EIS for spin-outs | R&D tax credits founders’ guide | Innovate UK grant accounting
Godwin Pinto ACA (ICAI) is the founder of AccTek and a member of ICPA, with 20+ years of experience in accounting and tax for contractors, startups and SMEs. Previously at PwC.
AccTek is a member firm of the Institute of Certified Practising Accountants (ICPA), and our founder is a member of the Association of International Accountants (AIA) holding an AIA Practising Certificate. Our accountants hold qualifications and accreditations from trusted professional bodies including the AIA, ICPA, AAT and ACCA.
