What is finance income under section 357BG of the Corporation Tax Act 2010?

Finance income under section 357BG includes credits from loan relationships or derivative contracts treated as trading receipts, amounts recognised under generally accepted accounting practice as arising from a financial asset, and returns economically equivalent to interest. These amounts must be stripped out of trading profits before calculating relevant IP profits under the Patent Box regime.

Why must finance income be excluded from Patent Box profit calculations?

Finance income is excluded to ensure the Patent Box reduced corporation tax rate of 10 per cent applies only to profits genuinely derived from qualifying intellectual property. By removing financial and investment-type returns embedded in trading profits, the regime targets its benefit solely at income attributable to patented innovations and other qualifying IP rights.

How is a return economically equivalent to interest measured under section 357BG?

The return is measured as the profit that would be treated as arising from a deemed loan relationship under the disguised interest rules in the Corporation Tax Act 2009. Importantly, certain statutory exclusions that normally narrow those rules are disregarded, so the Patent Box definition catches a broader range of disguised interest returns than would apply in other contexts.

What are the three categories of finance income defined by section 357BG?

The three categories are: first, credits from loan relationships or derivative contracts brought into the trade as receipts; second, amounts recognised under UK GAAP or IFRS as arising from a financial asset such as fair value gains on financial instruments; and third, any return from an arrangement that is economically equivalent to interest under the disguised interest rules.

Corporation Tax Act 2010 section 357BG

Finance income

Section 357BG defines what counts as "finance income" within a company's trade for the purposes of the Patent Box rules, so that it can be excluded when calculating relevant IP profits.

Finance income includes credits treated as trading receipts from loan relationships or derivative contracts, amounts recognised under accounting standards as arising from a financial asset, and returns that are economically equivalent to interest.
A "financial asset" takes its meaning from generally accepted accounting practice (UK GAAP or IFRS), and "economically equivalent to interest" is interpreted using the disguised interest rules.
Where a return is economically equivalent to interest, its amount is the profit that would be treated under the disguised interest rules as arising from a deemed loan relationship, but ignoring certain exclusions and carve-outs that normally apply under those rules.
The purpose of stripping out finance income is to ensure that the Patent Box reduced rate of corporation tax applies only to profits genuinely derived from intellectual property, not from financial or investment-type returns embedded in the same trade.

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