University academics who launch "spin-out" companies to develop new technologies still face potentially ruinous tax bills, according to PricewaterhouseCoopers (PWC).

Academics who accept large sums of money from investors in return for a share of the business are most at risk, PWC claims.

Toughened tax rules introduced in July 2003 led to a sharp decline in the number of companies emerging from university research departments.

But according to PWC, draft legislation drawn up by the Government in July last year to address the issue is like a "sticking plaster on the problem".

The financial services giant said spin-out businesses only had a "hypothetical" value when they were formed and their tax bill should reflect this.

It said the Government has addressed part of the problem by ignoring the intellectual property value when calculating the academic's share in the business. But other factors could push hypothetical share values back up and still leave academics with an unmanageable tax charge, the group said.

For example, if a company receives £250,000 from the university to continue research in exchange for half of the company, the Inland Revenue values the company at £500,000 This would mean a £100,000 tax bill for the academic regardless of whether or not his or her big idea ever came to fruition.

Nigel Steele, tax director at PWC, said: "The draft legislation simply puts a sticking plaster on the problem - it is a long way from being a cure. The Government has focused on the intellectual property issue, leaving the founders of spin-out companies still facing potentially large tax bills.

"The worry of an immediate tax bill is a huge deterrent on its own but because taxable values are only agreed after the event, that bill is unknown and uncapped when the academic sets up the spin-out company."

He added: "The UK has some of the best scientists and engineers in the world and without certainty around the tax position of spin-out companies, their decline is likely to continue."

Mike Herd runs the Sussex Innovation Centre at Falmer, a business centre linked to the University of Sussex and home to hundreds of start-up firms.

He said: "The situation at the moment has certainly made academics very wary of getting themselves into a position where they can be hit with a huge tax bill.

"While some companies claim there are ways around it, it's still an extra hurdle for people who might be thinking about forming a spin-out."