The UK Supreme Court has ruled that ScottishPower cannot deduct approximately £28 million in regulatory settlement payments from its taxable trading profits, handing HM Revenue & Customs (HMRC) victory in a dispute over the tax treatment of payments made to consumers and charities.
In a unanimous judgment delivered on 21 October 2026, the Court overturned a January 2025 Court of Appeal ruling that had permitted the deductions. The decision also excludes £554,013 paid directly to customers affected by mis-selling, an amount that the First-tier Tribunal had initially allowed as deductible compensation.
The dispute concerned four settlements negotiated with the Gas and Electricity Markets Authority (GEMA), whose day-to-day regulatory work is carried out by Ofgem. ScottishPower Energy Retail Limited entered into the settlement agreements, while the subsequent tax appeal involved four companies within the ScottishPower group. The agreements required substantial payments benefiting consumers and charitable organisations, alongside nominal regulatory penalties of £1 under each settlement.
The settlements followed investigations into mis-selling, differences in charges between payment methods, energy-saving obligations and complaints handling. They were agreed between October 2013 and April 2016, following regulatory investigations into compliance with statutory requirements and energy supply licence conditions.
The two largest settlements involved £8.5 million following a mis-selling investigation and £18 million relating to complaints handling. Two further agreements provided for payments of £750,000 and £2.4 million, although part of the latter amount was paid by a company that subsequently left the ScottishPower group and was not included in the tax appeal.
ScottishPower deducted the relevant payments when calculating its trading profits. HMRC disputed their deductibility, maintaining that the expenditure was incurred in place of regulatory penalties and should not reduce taxable profits.
The First-tier Tribunal largely accepted HMRC's position but permitted a deduction for £554,013 paid directly to customers affected by mis-selling. It distinguished that amount from the other settlement payments because it considered the expenditure compensatory.
The Upper Tribunal subsequently rejected that distinction, finding that all the disputed payments formed part of settlements negotiated under the threat of substantial regulatory penalties. The Supreme Court agreed that the £554,013 could not be treated as ordinary compensation for tax purposes because it formed part of a negotiated regulatory settlement and was punitive in character.
In January 2025, the Court of Appeal ruled in ScottishPower's favour. It concluded that the established restriction on deducting penalties should not be extended through a separate judge-made rule to payments that were not formally fines or penalties.
The Supreme Court rejected that legal analysis, holding that the relevant restriction arose from section 54(1)(a) of the Corporation Tax Act 2009 rather than a separate rule excluding penalties from otherwise deductible expenditure. Lady Rose and Lord Doherty delivered the judgment, with Lord Reed, Lord Stephens and Lady Simler agreeing.
Section 54(1)(a) prevents deductions for expenses that are not incurred wholly and exclusively for the purposes of a trade. The Supreme Court explained that penalties imposed for breaches of legal obligations are not incurred for the purposes of carrying on a trade, even where the conduct giving rise to the penalty occurred during trading activities.
Applying that reasoning, the justices concluded that ScottishPower's payments were sufficiently similar to penalties because they had been negotiated with the regulator in place of substantial financial sanctions following breaches of regulatory obligations. Having concluded that the payments were not incurred for the purposes of ScottishPower's trade, the Court found it unnecessary to consider whether they had a dual purpose.
The fact that the money went to consumers and charities, rather than being paid directly to the regulator as a fine, did not alter the conclusion. The Court assessed the character and purpose of the expenditure within the regulatory settlements rather than relying solely on how the payments were formally classified.
The formal penalties imposed under the four settlements were nominal amounts of £1, while the much larger payments were directed towards consumers, consumer organisations and charities. That distinction had been central to ScottishPower's successful argument before the Court of Appeal, which treated the payments as legally different from fines.
The Supreme Court instead considered the circumstances in which the expenditure arose. The payments were agreed during regulatory enforcement proceedings and were taken into account when GEMA determined that nominal penalties were appropriate.
The complaints-handling settlement illustrates the arrangement. ScottishPower agreed to provide £18 million in consumer redress in place of a substantial financial penalty, with the regulator imposing a nominal £1 penalty.
The judgment establishes that the formal classification of a payment is not necessarily decisive for corporation tax purposes. The nature of the expenditure and the reason it was incurred must also be considered when determining whether a deduction is available.
The ruling restores the Upper Tribunal's decision that the disputed settlement payments cannot be deducted when calculating ScottishPower's taxable trading profits. The approximately £28 million represents the expenditure for which tax deductions were claimed, rather than an additional corporation tax bill of £28 million.
The decision is relevant to businesses negotiating regulatory settlements involving payments to consumers or other third parties. Such payments may be non-deductible where they are punitive in character and are made in place of financial penalties arising from regulatory breaches.
However, the judgment does not establish that all customer compensation or consumer redress payments are non-deductible. Ordinary compensation must be assessed according to its own circumstances and the applicable corporation tax rules.
The Supreme Court's ruling confirms that substantial payments made under regulatory enforcement settlements cannot necessarily obtain different tax treatment simply because the formal penalty is nominal. Directing the money towards consumers rather than the regulator does not, by itself, establish that the expenditure qualifies for a corporation tax deduction.
