The UK Supreme Court has ruled that ScottishPower companies could not deduct about £28 million in customer-redress payments from their taxable profits, treating the payments as part of a punitive regulatory package rather than ordinary expenditure incurred for the purposes of their trade.
The payments arose from four settlements with Ofgem over serious breaches of electricity and gas licence obligations and energy-efficiency requirements. The regulator imposed nominal fines of £1 alongside commitments to pay money to customers and consumer initiatives. The companies argued that the redress was compensatory and commercially connected to their supply businesses, making it deductible under section 54 of the Corporation Tax Act 2009.
A unanimous Supreme Court allowed HM Revenue and Customs’ appeal and restored the Upper Tribunal’s conclusion. Looking at the settlements in substance, the court said the redress was made under the threat of financial penalties of a similar scale and formed an integral part of the regulatory sanctions. The fact that Ofgem chose £1 fines did not turn the much larger accompanying payments into ordinary business expenses.
The analysis also covered £554,013 paid directly to affected customers. Although those sums had a compensatory destination, the court held that they remained part of the same punitive settlement package. The statutory question was why the expenditure was incurred, not simply who ultimately received it.
The judgment draws a clear tax boundary around negotiated regulatory outcomes. A company cannot obtain a corporation-tax deduction merely because a regulator directs money toward consumers or public-interest projects instead of collecting the same amount as a formal penalty. The legal character depends on the function of the payment in the enforcement arrangement as a whole.
The decision is final in the domestic appeal. It restores the assessment position advanced by HMRC and displaces the contrary result reached by the Court of Appeal.
Read the official Supreme Court judgment.
