ScottishPower (SCPL) Limited and others v Commissioners for His Majesty’s Revenue and Customs

Fines and penalties are excluded from deductible trading expenses because they are paid to answer wrongdoing, rather than for the purposes of trade. The exclusion follows section 54(1)(a) of the Corporation Tax Act 2009, rather than a separate policy-based rule. Agreed regulatory redress payments share that treatment where, in substance, they are punitive payments made instead of substantial penalties. Their character depends on the substance of the settlement and the overall package, rather than their label, recipient or accounting treatment. An amount paid directly to affected customers remains non-deductible where it forms part of that punitive package. The taxpayer’s culpability, already reflected in the regulatory assessment, does not determine deductibility.

The respondents were four ScottishPower companies. ScottishPower Energy Retail Limited held gas and electricity supply licences, while the other respondents held electricity generation licences. The Gas and Electricity Markets Authority, acting through Ofgem, investigated breaches concerning marketing, payment methods, energy-saving obligations and complaints handling. The investigations ended in settlement agreements requiring consumer and charitable redress payments, accompanied by nominal £1 penalties. The respondents bore approximately £28 million of those payments, partly under intercompany arrangements.

HMRC disputed deductions claimed when calculating trading profits for corporation tax. The First-tier Tribunal, [2022] UKFTT 41 (TC), allowed deductions only for £554,013 paid to customers affected by mis-selling. On appeals by both sides, the Upper Tribunal, [2023] UKUT 218 (TCC), held that none of the payments was deductible. The Court of Appeal, [2025] EWCA Civ 3, allowed the respondents’ appeal and permitted all the deductions.

HMRC appealed. The central questions were whether penalties were excluded by the statutory trade-purpose requirement or a separate policy-based rule, and whether the agreed redress payments, including the payments to affected customers, shared the character of penalties.

Held, unanimously, allowing HMRC’s appeal and restoring the Upper Tribunal’s decision, that none of the redress payments was deductible.

1. Penalties were excluded because they were not expenditure incurred for the purposes of trade within section 54(1)(a) of the Corporation Tax Act 2009. Their object was punishment and deterrence. The taxpayer paid to answer a breach, rather than to carry on the trade. A connection with trading activities was insufficient. That statutory basis was apparent from Inland Revenue Commissioners v Alexander von Glehn & Co Ltd and was confirmed by McKnight v Sheppard (paras [81]–[86]).

2. The policy discussion in McKnight v Sheppard did not establish a separate judge-made restriction operating through section 46(1). Sharing the financial burden with the public explained a consequence supporting the statutory construction. It did not replace the trade-purpose requirement (paras [83]–[87]).

3. The redress payments were sufficiently akin to penalties to attract the same treatment. Although entry into the settlements was a choice, the tribunal had found that substantial penalties of a similar magnitude would probably otherwise have followed. The decision notices linked the payments to admitted regulatory breaches and the penalties avoided. Energy supply licence conditions were statutory regulatory obligations, rather than contractual promises giving rise to private compensation. The substance of the arrangements therefore governed their treatment (paras [89]–[94]).

4. The £554,013 paid to customers directly affected by mis-selling formed part of the overall punitive package negotiated under threat of penalties. Its compensatory aspect did not justify separate treatment. It was punishment for regulatory breaches, rather than damages for a tortious wrong. The recipient of a payment, including whether it went to consumers, charities or the Consolidated Fund, did not change its nature (paras [94], [99]).

5. Recognition as an expense under generally accepted accounting practice did not determine statutory deductibility. Nor did the practical unavoidability or inadvertence of a breach make punitive payments deductible. Herald and Weekly Times v Federal Commission of Taxation, concerning defamation damages, did not govern regulatory penalties or equivalent redress. Culpability had already been reflected in the regulatory assessment (paras [94], [96]–[97]).

6. The court left outside its decision the deductibility of legal fees incurred in resisting disciplinary proceedings and the issue of duality of purpose. Earlier remedial expenditure might present difficult questions of characterisation, but the payments in this appeal were readily identifiable. The Upper Tribunal’s decision was restored (paras [80], [95], [98], [100]).

• United Kingdom Supreme Court, [2026] UKSC 35 : unanimously allowed HMRC’s appeal, reversed the Court of Appeal and restored the Upper Tribunal’s decision that none of the redress payments was deductible.
• Court of Appeal, [2025] EWCA Civ 3 ; [2025] 1 WLR 2225 : allowed ScottishPower’s appeal and held that all the redress payments were deductible.
• Upper Tribunal, [2023] UKUT 218 (TCC) ; [2023] STC 1579: on appeals by both sides, allowed HMRC’s appeal concerning £554,013 and held that none of the payments was deductible.
• First-tier Tribunal, [2022] UKFTT 41 (TC); [2022] SFTD 576: allowed ScottishPower’s appeal concerning £554,013 paid to customers affected by mis-selling, but dismissed it concerning the remaining payments.