Over the summer, there were several stories about big name artists and songwriters selling the rights to their back-catalogues for even bigger sums.
Be it as a result of lost income as concerts and festivals came to a grinding halt during the pandemic or ageing icons wanting to dictate the fate of their life’s work; selling a back catalogue or artistic rights is becoming an increasingly lucrative option for many musicians/songwriters.
Whilst much has been written about the commercial rationale of these sales, unsurprisingly, the tax consequences are much less publicised.
Historically, the sale of an artist’s back catalogue occurred when the artist was no longer around to control it and the catalogue would either be sold to the highest bidder or left to generate ever-decreasing royalties.
Kieran Jay, head of our Music group commented: “The growing trend of artists selling their back catalogue, centres around a re-evaluation of how to realise income from their work - in addition to music copyrights being recognised in financial circles as stable and growing income generating assets in a streaming age. Plus legitimate concerns from some artists about how their work will be cared for after death.”
The future of music exploitation is bright. Everyone from investment funds, to publishers, to FinTech companies are trying to get in on the action of dealing in music rights. Ventures like Beatclub (founded by Timbaland) are creating a platform which will allow fans to buy and trade in shares of music – shows that there is still untapped potential out there in the investment value of music. As a result, artists are now realising the benefits of selling their music with the right price within their lifetime.
The tax position
There is some debate within the industry as to whether the sale of an artist’s back catalogue (which is in essence a sale of the underlying intellectual property) should be taxed as income (i.e. a source of income for the artist taxable at 45% for high earners) or as capital (i.e. a capital asset that itself generates profits which are currently taxed at a more modest 20%).
What is the difference between income and capital? While this may sound like a simple question, lawyers, accountants and the courts have struggled to come up with a clear-cut answer.
In the context of back catalogue sales, there are a number of factors to consider such as who is making the sale and what is in fact being sold.
Sale by an individual
Being an artist is treated as a vocation by HMRC. Vocational income is subject to income tax. Accordingly, when an individual sells their back catalogue in their own name, this will be subject to income tax. This is because the artist will be seen as carrying on a profession which creates and exploits the IP.
There are arguments that an individual could advance to persuade HMRC that any lump sum payment or future royalties should be treated as capital, however, these would require a proper examination of the nature of the artist’s trade and the reason for the sale.
Sale of shares in a company
Often, the artist will have set up a limited company to hold any IP and will simply seek to sell the company which holds the assets. If the sale happens at corporate level, whilst you would be forgiven for thinking that this would avoid an income tax charge - this is not correct.
The sales of occupational income rules mean that the sale proceeds could be subject to income tax.
One would also have to be mindful of the fact that depending on when the IP was created, different items within the back catalogue may attract different tax treatment.
Company sale of IP
When looking at a corporate disposal, depending on the age of the IP, it may fall within the intangibles regime. It is therefore important to assess each item being sold rather than to simply look at the package as a whole.
Another point to note is that if the artists want to get any funds out of the company following any sale, there would be further tax to pay (in addition to the corporation tax on sale) to extract the profits from the business, meaning that this route may not be tax efficient.
Helpfully, there are a number of tax reliefs that could be available when selling through a company. Which reliefs are available is once again dictated by the unique circumstances of the artist and the nature of the transaction.
While selling their rights can offer an artist more control or an impressive pay-out, it does raise a number of tax issues which require careful thought when structuring any deal.
Corporate Tax partner David Scott explained: “Ultimately the tax treatment of a back catalogue sale depends on the facts. It is therefore sensible to seek professional advice at the start of the process.”
Inevitably the answers to these tax questions will differ from artist to artist and so a focussed tax analysis before, during and after negotiation of the price, is sensible.