Hit songs fund moves tax base following substance concerns

A £1.1BN smash-hit fund that has made global headlines by buying the rights to famous songs has switched its tax residency to the UK – citing the need to mitigate the ‘increased scope’ of Guernsey’s economic substance rules.

Ed Sheeran (29431257)
Ed Sheeran (29431257)

Hipgnosis Songs Fund owns dozens of music catalogues 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 more than £1.1bn from the market and is on the FTSE250 Index, attracting investors with its mission to produce returns from royalties accrued on songs held by the fund.

When it 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, a former manager of artists such as Elton John and Beyonce, garnered headlines around the world.

But Hipgnosis has now switched to UK tax residency after gaining approval from HM Revenue and Customs to change its status – although local tax experts said it was not the start of a trend, with it relating to a specialist area and a handful of funds.

In a regulatory update, Hipgnosis said: ‘The company will be treated as being resident in the UK for tax purposes.’

The move means the company is no longer a Guernsey tax-exempt vehicle.

It added: ‘The company 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] that are self-managed collective investment schemes.’

Economic substance rules are designed to address concerns that companies could be used to artificially attract profits not commensurate with economic activities and substantial economic presence in Guernsey. The regulations apply to a range of activities as identified by the OCED’s Forum on Harmful Tax Practices.

Generally companies are required to demonstrate they have substance in the island by being ‘directed and managed’, conducting ‘core income generating activities’ and ‘there being adequate people, premises and expenditure’ in Guernsey.

Guernsey tax expert Tony Mancini from KPMG Channel Islands, said: ‘This is a very niche area. There are only a handful of self-managed funds that fall within the economic substance rules. I don’t see this as the start of a trend.’

Hipgnosis has also set out in more detail what the tax switch would mean in practice. The move means it is exempt from UK taxation on chargeable gains, but will be liable to UK corporation tax on dividend income received.

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