In Scottish Power & Ors v HMRC [2023] UKUT 218, the Upper Tribunal (UT) found that £28 million of consumer settlements paid by a power provider were in lieu of penalties and so were non-deductible for Corporation Tax purposes.

  • Investigations by Ofgem found companies within the Scottish Power group had breached regulations between 2013 and 2016, in relation to mis-selling, cost-reflectivity, energy saving and complaints handling.
  • In each case, penalties of £1 were imposed and in return, Scottish Power negotiated settlements to be paid to consumers, consumer bodies and charities, amounting to £28 million.
  • Scottish Power was not obliged to make the payments but did so in acknowledgement that lower penalties would be imposed as a consequence.
  • These amounts were claimed as deductions in the Corporation Tax computations of the relevant companies, as payments made in the Course of business.
  • HMRC denied the deductions on the basis the payments were in lieu of Penalties (which are not deductible) and on appeal, the First Tier Tribunal (FTT) agreed with HMRC and the appeal was dismissed.
  • The FTT did allow one payment of £554,013 to be deducted, as this was a compensation payment.
  • Scottish Power appealed to the UT and HMRC appealed the one deduction that had been granted.

The UT found that:

  • The FTT had been wrong in its approach of assessing each payment on its punitive or compensatory nature. The payments were all part of one package. It was the nature of the package overall that had to be assessed.
  • The FTT was correct in finding that there was no element of the payments that related to contractual damage, as they were imposed by a regulator only concerned with regulatory breaches. All correspondence regarding the payments referred to penalties or payments in lieu of penalties.
  • The House of Lords decision in McKnight (HM Inspector of Taxes) v Sheppard [1999] 1 WLR 1333, [1999] STC 669 sets out the principle that payments which are punitive in nature or in lieu of such payments are non-deductible and the decision was applicable to the facts of this case.
  • On that basis, Scottish Power's appeal was dismissed. HMRC's appeal was allowed and the remaining deductible payment was found to be non-deductible.

Useful guides on this topic

Tax adjustments to profits: Corporation Tax
 What are the Tax adjustments that must be made to profits for Corporation Tax purposes?

Wholly and exclusively...toolkit
When is an expense allowed for tax purposes? What does 'wholly and exclusively' mean? How do you determine if a cost is wholly and exclusively incurred for the purpose of a trade? What cases are there?  

External links

Scottish Power & Ors v HMRC [2023] UKUT 218 

Scottish Power (SPCL) Ltd and others v HMRC [2022] TC08393


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