The hit song fund changes tax base due to substance issues
Hipgnosis Songs Fund has dozens of music catalogs made up of thousands of songs, including Journey’s Don’t Stop Believin, Amy Winehouse’s Back to Black, and Ed Sheeran’s Castle on a Hill.
It has raised over £ 1.1bn in the market and is part of the FTSE250 index, enticing investors with its mission to generate income from the royalties accrued on songs held by the fund.
When launched in 2018, the Guernsey-registered investment company was hailed as an example of the island supporting innovation and showcased its expertise internationally as the fund, founded by Merck Mercuriadis, former manager of artists such as Elton John and Beyonce grabbed the headlines. around the world.
But Hipgnosis has now moved to UK tax residency after getting approval from HM Revenue and Customs to change his status – although local tax experts have said this was not the start of a trend, with a specialized area and a handful of funds.
In a regulatory update, Hipgnosis said: “The company will be considered resident in the UK for tax purposes.”
This decision means that the company is no longer a tax-exempt vehicle in Guernsey.
He added: “The company has applied to become an investment trust company to mitigate the recently increased scope of Guernsey’s economic substance rules, which now apply to Guernsey entities. [including Guernsey tax-exempt vehicles] which are self-managed collective investment undertakings.
The economic substance rules are designed to address concerns that businesses could be used to artificially attract profits disproportionate to economic activities and a substantial economic presence in Guernsey. The regulations apply to a range of activities identified by OCED’s Harmful Tax Practices Forum.
In general, companies are required to demonstrate that they have substance on the island by being ‘directed and managed’, by carrying out ‘basic income generating activities’ and by’ having enough people, of premises and expenses ”in Guernsey.
Guernsey tax expert Tony Mancini of KPMG Channel Islands said: “This is a very specialized area. There are only a handful of self-managed funds that fall under the rules of economic substance. I don’t see this as the start of a trend.
Hipgnosis also explained in more detail what the tax change would mean in practice. The move means that it is exempt from UK tax on taxable gains, but will be subject to UK corporation tax on dividend income received.