ScottishPower (SCPL) Limited and others v Commissioners for His Majesty’s Revenue and Customs [2026] UKSC 35

ScottishPower sought corporation tax deductions for about £28 million paid to customers and charities under Ofgem settlements in place of fines. The Supreme Court held that the payments were akin to penalties, not incurred for the trade's purposes, and so not deductible.

Facts

The Respondents (together, “ScottishPower”) were members of the ScottishPower group. ScottishPower Energy Retail Limited (“SPERL”) held gas and electricity supply licences, and the other three Respondents held electricity generation licences. Ofgem, acting for the Gas and Electricity Markets Authority (“GEMA”), carried out four investigations. They found that SPERL had breached several standard licence conditions and the Electricity and Gas (Community Energy Saving Programme) Order 2009. The breaches concerned mis-selling and doorstep marketing (SLC 25), cost-reflectivity of payment methods (SLC 27.2A), carbon reduction targets under the CESP Order, and complaints handling and billing.

GEMA has power under section 27A of the Electricity Act 1989, and the equivalent provision of the Gas Act 1986, to impose penalties. Those penalties are paid into the Consolidated Fund. In each investigation Ofgem indicated that substantial penalties would be sought, with discounts for early settlement under GEMA’s Penalties Policy. Each investigation ended in a settlement agreement. SPERL admitted the breaches and agreed to make payments to vulnerable customers, affected customers, charities (including ScottishPower Energy People Trust) and a Citizens Advice campaign. GEMA imposed a nominal penalty of £1 in each case. The “Redress Payments” totalled about £28 million. Some were borne by the other Respondents under an intercompany agreement. GEMA’s published Notices of Decision recorded that the penalty would have been higher if SPERL had not settled, admitted the breaches and agreed to make the payments.

It was common ground that a £28 million fine would not have been deductible. ScottishPower argued that the Redress Payments were not penalties and so were deductible in computing trading profits.

Procedural History

The First-tier Tribunal ([2022] UKFTT 41 (TC)) found that SPERL had not been compelled to settle. It also found that, had it not settled, a penalty of the same order of magnitude would probably have been borne, so that the settlements were made “in place of” penalties. It held that a rule of statutory interpretation disallowed punitive, non-compensatory payments. However, it allowed a deduction for £554,013 paid to customers affected by mis-selling, which it regarded as compensatory.

The Upper Tribunal ([2023] UKUT 218 (TCC)) held that the non-deductibility of penalties rests on the construction of the “purposes of the trade” test, not on a judge-made adjustment. It held that the payments had to be assessed globally as an overall package, so that none, including the £554,013, was deductible.

The Court of Appeal ([2025] EWCA Civ 3; Falk LJ, with whom Snowden and Zacaroli LJJ agreed) allowed ScottishPower’s appeal. Relying on Lord Hoffmann’s reference to “legislative policy” in McKnight v Sheppard (1999) 71 TC 419, and on NCL Investments Ltd v Revenue and Customs Commissioners [2022] UKSC 9, it treated the rule against deducting penalties as a judge-made “adjustment required or authorised by law” under section 46(1) of the Corporation Tax Act 2009 (“CTA 2009”). On that view the rule should not be extended to payments that were not in fact penalties, and any extension was a matter for Parliament. HMRC appealed.

Issues

• Why are penalties imposed on a taxpayer not deductible in computing trading profits? Is the reason that they are not incurred “wholly and exclusively for the purposes of the trade” under section 54(1)(a) CTA 2009, or that a judge-made adjustment applies under section 46(1)?
• Should the Redress Payments, including the £554,013 paid to mis-sold customers, be treated in the same way as penalties and therefore be non-deductible?

Arguments

ScottishPower

ScottishPower supported the Court of Appeal’s reasoning. They argued that penalties are excluded by a policy rule tied to the penalising legislation, which applies even where the expenditure is otherwise incurred wholly and exclusively for the trade. On their case, the Redress Payments were incurred for the trade and no comparable policy required their disallowance. They also argued that:

• the payments were voluntary;
• they were akin to compensation for breach of contract, the licence being the relevant “contract”;
• they went to recipients selected under GEMA’s processes rather than to the Consolidated Fund; and
• relying on Herald and Weekly Times v Federal Commission of Taxation (1932) 48 CLR 113, some breaches were practically unavoidable incidents of carrying on the business.

HMRC

HMRC contended that the payments were made in lieu of penalties and shared their character. They also argued that the Upper Tribunal was right to treat the £554,013 as part of the overall package.

Judgment

Lady Rose and Lord Doherty gave the joint judgment, with which Lord Reed, Lord Stephens and Lady Simler agreed. The Court was unanimous.

The authorities on purpose

The Court reviewed the general authorities on the purpose test: Strong & Co of Romsey v Woodifield [1906] AC 448, 5 TC 215; Mallalieu v Drummond (Inspector of Taxes) [1983] 2 AC 861; and MacKinlay v Arthur Young McClelland Moores & Co [1990] 2 AC 239. These establish that the taxpayer’s conscious purpose is not necessarily determinative, and that every purpose of the expenditure must be a trade purpose. Lord Davey’s statement in Strong v Woodifield was central: a connection with the trade is not enough, and the expenditure must be made for the purpose of earning profits.

Why penalties are not deductible

The Court traced the penalty cases from Inland Revenue Commissioners v Warnes & Co [1919] 2 KB 444 and Inland Revenue Commissioners v Alexander von Glehn & Co Ltd [1920] 2 KB 553 through to McKnight and McLaren Racing Ltd v Revenue and Customs Commissioners [2014] UKUT 269 (TCC). It held:

“It is clear on the authorities that penalties are not deductible. In our view it is also clear that the reason they are not deductible is that they are not incurred for the purposes of the trade.”

Penalties are punishments for wrongs. Their object is to punish and deter, and the taxpayer pays them to answer for the breach, not to carry on the trade. The Court considered that this was “tolerably clear” from von Glehn. It thought Lord Hoffmann had overstated matters in calling those judgments “curiously inarticulate”. The Court was also reluctant to dismiss any of the formulations used in von Glehn as unhelpful in future cases.

On the Court of Appeal’s reading of McKnight, the Court said:

“In our judgment, that was a misreading of Lord Hoffmann’s reasoning. His reference to dilution of punishment simply pointed to a likely consequence if penalties were to be deductible.”

Lord Hoffmann had proceeded on the basis that, properly construed, the predecessor provision did not cover penalties because of their nature. He was not relying on a policy-based, judge-made rule. Nor was there any inconsistency with the authorities that focus on the taxpayer’s purpose. The legislature’s or regulator’s intention may help to decide whether a payment is in the nature of a penalty, but it does not determine the taxpayer’s purpose:

“That purpose is to satisfy a legal obligation which arises usually under statute to punish the taxpayer for infringing rules which bind him in the conduct of his trade. That is the taxpayer’s purpose in making the payment and it is that purpose which, on the true construction of section 54(1)(a), is not a purpose of the trade.”

The Court accepted that policy reasons support this construction, including the unfairness of the taxpayer sharing the burden of a penalty with the public. It rejected Falk LJ’s suggestion that regulators could gross up redress payments to offset their tax treatment. That raised public law questions, and regulators could not readily predict the accounting or HMRC treatment of a payment.

Whether the Redress Payments are akin to penalties

The Court rejected the description of the payments as voluntary. SPERL was not compelled to settle, but the tribunal’s finding was “clear and inevitable”: without settlement, SPERL would have faced fines of the same or similar amounts. The Court also identified a “counterintuitive result” if the two were treated differently. A licensee caught “bang to rights” is more likely to settle quickly and would obtain a deduction, while a licensee with a more arguable case, which contests the matter and is fined, would not. The Court said this did not involve assessing tax on what did not happen. It simply confirmed that, in substance rather than form, the payments were akin to penalties.

The Court rejected the breach of contract analogy. It noted that the CESP breach was of a statutory instrument, not a licence condition, and held:

“The licence conditions are not, in our judgment, like a contract, they are more like a statutory obligation.”

The payments were not a private law remedy intended to restore anyone to their pre-breach position. GEMA’s published decision notices showed a direct link between the payments and the penalty that would otherwise have been imposed. They recorded findings of breach, the appropriateness of a penalty, the role of deterrence, and any gain to SPERL. The Court concluded:

“We have no doubt that the Redress Payments are sufficiently akin to penalties for it to be clear, on the basis of the case law we have discussed earlier, that they were not expenditure incurred for the purposes of ScottishPower’s trade within the meaning of section 54(1)(a).”

Like the settled sums in Warnes and von Glehn, the payments were made to avoid substantial penalties. The Court noted that the penalties in those older cases were themselves payable under consent orders following settlement. It made no difference that the money went to recipients other than the Consolidated Fund. Nor did it matter that generally accepted accounting practice would treat the payments as expenses, given the qualification in section 46(1) and Warrington LJ’s observation in von Glehn.

Other points

• Compliance spending. Falk LJ had been concerned about distinguishing the payments from expenditure on remedying compliance failures. The Court held that the same issue would arise if penalties had simply been imposed. It acknowledged there may be difficult dividing lines in some cases, which HMRC and ultimately the tribunal would resolve. No such difficulty arose here, because the Redress Payments were clearly identified in the decision notices.
• Unavoidable breaches. The Court held that Herald and Weekly Times, a case about defamation damages, “has no place in assessing whether penalties or redress payments are tax deductible”. SPERL’s culpability had already been factored into the amounts through GEMA’s penalty assessment.
• Duality of purpose. Having decided the case on the nature of the payments, the Court found it unnecessary to consider duality of purpose.
• The £554,013. The Court agreed with the Upper Tribunal that this sum was not akin to tortious damages. It was as much a punishment as the other payments and was part of the package negotiated as an overall deal.

Implications

The decision places the non-deductibility of penalties within the statutory test in section 54(1)(a) CTA 2009. It rejects the Court of Appeal’s view that it is a free-standing judge-made adjustment under section 46(1). This removes the premise that the rule must be confined narrowly to formal penalties. The relevant question is whether, in substance, a payment has the nature of a penalty, so that the taxpayer’s purpose in paying it is to answer for a breach rather than to carry on the trade.

For regulated businesses, particularly in sectors where regulators resolve investigations through redress or voluntary payments and nominal fines, the case shows that a settlement structure will not of itself secure a deduction. That is especially so where the payments are arrived at under threat of penalty and are linked to the penalty in published decision notices. The Court’s reasoning drew heavily on the specific findings and the regulatory materials: the Penalties Policy, the settlement process, and decision notices explaining that the penalty was reduced because of the payments. Practitioners should therefore be cautious about treating the result as automatic for every regulatory settlement.

The Court expressly recognised that some cases may raise difficult distinctions between non-deductible sums paid at the close of an investigation and expenditure on remediation, or on pre-empting or appeasing a regulator earlier on. It left those questions to be resolved on their facts. The Court also confined its discussion of McKnight to why penalties are not deductible, and did not address the deductibility of legal costs of resisting disciplinary proceedings. It expressed no concluded view on the continued relevance of Herald and Weekly Times to defamation damages. More broadly, the judgment reaffirms that substance prevails over form, and that accounting treatment does not settle deductibility for corporation tax purposes.

Verdict: The Supreme Court unanimously allowed HMRC’s appeal and restored the decision of the Upper Tribunal. None of the Redress Payments, including the £554,013 paid to customers affected by mis-selling, was deductible in computing ScottishPower’s trading profits, because they were akin to penalties and not incurred wholly and exclusively for the purposes of the trade under section 54(1)(a) CTA 2009.

Source: ScottishPower (SCPL) Limited and others v Commissioners for His Majesty's Revenue and Customs [2026] UKSC 35