Scottishpower (SCPL) Limited & Ors v The Commissioners for HMRC

Payments made under regulatory settlements are non-deductible where, viewed in substance and globally, they have the character of fines or penalties. This applies where payments are negotiated and made in lieu of a penalty, even though they are described as consumer redress, made voluntarily, or directed to consumers or charities. The question is one of overall characterisation, not formal designation. Compensatory features are relevant but do not require separate parts of a wider penal package to be treated as deductible. The statutory accounting rule in the Corporation Tax Act 2009 does not displace this result, which follows from the proper construction of the statutory deduction provisions.

The taxpayers, energy suppliers regulated by Ofgem, entered into settlement agreements concerning regulatory breaches involving mis-selling, billing, complaints handling, costs reflectivity and energy-saving obligations. They paid nominal penalties and approximately £28 million to consumers, charities and consumer groups. HMRC denied corporation tax deductions for the payments.

The First-tier Tribunal held that most payments were penal and non-deductible, but allowed a deduction for £554,013 paid to consumers directly affected by mis-selling. The taxpayers appealed, and HMRC cross-appealed against that allowance. The central issues were the scope of McKnight [1999] 1 WLR 1333, the effect of section 46 of the Corporation Tax Act 2009, and whether the payments should be characterised globally or separately.

1. The taxpayers’ appeals were dismissed. HMRC’s appeal was allowed. The FTT decision was set aside and remade so that the £554,013 payment, like the other payments, was non-deductible.
2. McKnight [1999] 1 WLR 1333 establishes that expenditure having the character of a fine or penalty falls outside the statutory deduction for expenses incurred for the purposes of the trade. The earlier discussion of penalties formed part of the ratio decidendi and was binding. It was not an extra-statutory rule overriding generally accepted accounting practice.
3. The principle applies to payments made in lieu of penalties. Whether a payment is formally designated or imposed as a penalty is relevant but not determinative. The tribunal must assess the substance of the arrangements, including the investigation, negotiations, settlement agreement, regulatory context and the likelihood that a penalty would otherwise have been imposed.
4. The distinction between punitive and compensatory expenditure is ultimately one of characterisation. Features such as payment to identified consumers, calculation by reference to loss, or commercial reasons for settling may be relevant, but they are not separate statutory conditions. Payments arising from trading activities may still be penal.
5. Where payments form part of an overall package, the assessment must be global. A tribunal should not first characterise the package as penal and then isolate components with compensatory features as deductible. The £554,013 was part of the negotiated £8.5 million package made under threat of a substantially larger penalty, and therefore shared its penal character.

• First-tier Tribunal (Tax Chamber): in Scottish Power (SPCL) Ltd and others v HMRC [2022] UKFTT 41 (TC), most payments were held non-deductible, but £554,013 paid to affected consumers was treated as compensatory and deductible.
• Upper Tribunal (Tax and Chancery Chamber): the taxpayers’ appeals were dismissed; HMRC’s appeal was allowed; the FTT decision was set aside and remade.