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

A statutory rule prevents deductions for fines or penalties imposed under a legislative regime, even where they arise from trading activities. The rule is best understood as a judge-made adjustment required by law under section 46(1) of the Corporation Tax Act 2009. It must be clear, and courts cannot create wider tax restrictions based on broad public policy. The rule does not extend to payments which are not themselves fines or penalties merely because they replace or reduce a penalty. The payment actually made must be characterised under ordinary statutory principles. Regulatory redress paid to consumers or charities may therefore be deductible where it is incurred wholly and exclusively for the trade. The appeal was allowed.

ScottishPower appealed against the denial of corporation-tax deductions for approximately £28 million paid to consumers, charities and consumer organisations under four agreements settling regulatory investigations by Ofgem and GEMA. The First-tier Tribunal dismissed the appeal except for £554,013 which it regarded as compensatory: [2022] UKFTT 41 (TC). The Upper Tribunal held that all the payments were non-deductible because they had the nature or character of penalties: [2023] UKUT 00218 (TCC). The central issue in the Court of Appeal was whether the rule in Commissioners of Inland Revenue v Alexander von Glehn & Co Ltd extended to settlement payments made in place of penalties, although only nominal penalties were actually imposed.

The Court of Appeal, in a unanimous judgment given by Lady Justice Falk with Lord Justice Snowden and Lord Justice Zacaroli agreeing, allowed the appeal.

1. The principle in von Glehn is that fines or penalties imposed under a legislative regime are not deductible in computing trading profits, even if incurred in the course of trading. The better statutory analysis is that the principle operates as an adjustment required by law under section 46(1) of the Corporation Tax Act 2009. A judge-made restriction must clearly apply notwithstanding profits calculated in accordance with generally accepted accounting practice. Courts cannot create new tax restrictions at large.
2. The principle does not extend to payments which are not in fact fines or penalties merely because they replace, reduce or are agreed in lieu of a penalty. The nature of the payment actually made must be examined. There was no authority for determining deductibility by reference to the character of a payment which it replaced. The uncertainty that would result from HMRC’s approach reinforced that the matter was for Parliament.
3. Only nominal £1 penalties were imposed. GEMA’s notices and statutory powers showed that the payments to consumers and organisations were not penalties redirected away from the Consolidated Fund. They were alternative redress payments. GEMA’s objectives and the fact that the payments were made in settlement did not make them penalties.
4. For section 54(1)(a), the relevant purpose was that of ScottishPower, not GEMA. Deductibility did not depend on whether each payment compensated a recipient for an identified loss. The First-tier Tribunal’s findings that the payments were accounted for as expenses and incurred wholly and exclusively for the trade were not challenged. There was therefore no legal rule preventing their deduction.

• Court of Appeal (Civil Division): Allowed the appeal and held the disputed payments deductible: [2025] EWCA Civ 3.
• Upper Tribunal (Tax and Chancery Chamber): Held that all the payments were non-deductible: [2023] UKUT 00218 (TCC).
• First-tier Tribunal: Dismissed the appeal except for £554,013 regarded as compensatory: [2022] UKFTT 41 (TC).