In Scottish Power Ltd v HMRC [2025] EWCA Civ3, the Court of Appeal (CoA) overturned a decision made by the Upper Tribunal (UT). The court found £28 million of settlements paid to customers were made in the course of business and were not penalties: they were an allowable deduction for Corporation Tax purposes.
After an investigation by Ofcom, the Scottish Power (SP) group was found to have breached various regulations concerning mis-selling, energy savings, cost transparency and complaints handling. A nominal penalty of £1 was imposed for the breach and the settlements were then negotiated with its consumers, which amounted to £28 million.
- The SP group deducted the payments when computing profits for Corporation Tax (CT). HMRC appealed this as the payments were in lieu of penalties and therefore not deductible for CT purposes.
- The First Tier Tribunal (FTT) agreed with HMRC that the penalties were not deductible but did allow one payment of £554,013 to be deducted because it was a compensation payment.
- SPG appealed to the UT.
- The UT dismissed the appeal referring to case law in McKnight (HM Inspector of Taxes) v Sheppard [1999] STC 669 which outlined that payments of a punitive nature are not deductible.
- The UT deemed the FTT wrong in its approach to assess each payment on its own punitive or compensatory nature. The UT decided all payments should be assessed together as one package meaning the one deductible compensation payment was no longer allowed.
The SP group appealed again:
- They maintained that the payments were not penalties in form or substance and the UT had erred in law by treating the case of McKnight as establishing that a payment in nature of a penalty is not deductible.
- HMRC had failed to apply s.54(1)(a) Corporation Tax Act 2009 which states expenses not incurred wholly and exclusively for the purposes of trade are not deductible.
- They did not agree that the whole £28 million should be assessed as one payment when there were different recognisable parts to the payments.
The Court of Appeal found that:
- It is the nature of the payment that is relevant when deciding if a payment is deductible as opposed to the purpose of the payment.
- The only penalty imposed was, in fact, the nominal £1 penalty. The payments made to consumers were not penalties, but payments made to settle regulatory investigations.
- It was accepted by the FTT and UT that the settlement payments replaced a penalty but regardless, no rule allows the deductibility of a payment to be determined by reference to the nature of a payment it replaces.
- The payments were made in the course of trading activity and therefore deductible when computing trading profits.
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