If a regulated company settles an investigation by paying customers and charities instead of a fine, can it deduct those payments for corporation tax? For ScottishPower’s payments, the Supreme Court said no on 21 October 2026. In ScottishPower (SCPL) Limited and others v Commissioners for His Majesty’s Revenue and Customs [2026] UKSC 35, the Court allowed HMRC’s appeal and held that about £28 million of redress payments agreed with the energy regulator in place of penalties were not deductible. Lady Rose and Lord Doherty gave the judgment, with which Lord Reed, Lord Stephens and Lady Simler agreed.
What the case was about
Between 2013 and 2016 Ofgem investigated ScottishPower’s retail supply company over doorstep mis-selling, payment-method pricing, a missed energy-saving target and billing and complaints handling, and found serious breaches (paras 2, 22–37). Each investigation ended in a settlement with the Gas and Electricity Markets Authority: the company admitted the breaches, paid sums to affected customers, vulnerable customers, charities and a Citizens Advice campaign, and received a nominal penalty of £1 (paras 23, 28, 33, 37). The energy-saving investigation involved all four ScottishPower companies (paras 30–33). These were negotiated settlements, not the statutory consumer redress orders the regulator can also make (para 14). Ofgem had indicated much larger penalties if the cases were contested, up to £23 million before settlement discounts in the billing case (paras 27, 32, 36).
It was common ground that a fine would not have been deductible. ScottishPower argued that these payments were not fines and were incurred wholly and exclusively for the purposes of its trade, so section 54(1)(a) of the Corporation Tax Act 2009, which disallows expenses not incurred wholly and exclusively for that purpose, did not bar them (paras 3, 5, 38). The First-tier Tribunal allowed only about £554,000 paid directly to mis-sold customers; the Upper Tribunal allowed nothing; the Court of Appeal allowed everything, treating the bar on deducting penalties as a narrow judge-made adjustment that should not be extended to payments that are not strictly penalties (paras 69–79).
What the Supreme Court decided
Penalties are not deductible because they are not incurred for the purposes of the trade at all. They are punishments for wrongs the taxpayer has committed, and the taxpayer pays them to answer for its breach, not to carry on its trade (para 81). That is a matter of construing section 54(1)(a), not a separate policy-based rule: the Court of Appeal misread Lord Hoffmann’s reasoning in McKnight v Sheppard, whose reference to diluting the punishment described a consequence, not the legal basis (paras 83–86). The Court also rejected grossing up redress payments, to offset their tax treatment, as an appropriate response (para 87).
The redress payments were sufficiently akin to penalties to be treated in the same way (para 94). They were not voluntary in any real sense: the tribunal had found that, without settlement, penalties of the same order would very likely have been imposed (para 89). Treating them differently would let a company caught “bang to rights” deduct a quick settlement while one with an arguable defence that contested a penalty could not (para 90). Licence conditions are more like statutory obligations than a contract, and Ofgem’s published decision notices tied the payments directly to the penalty that would otherwise have been imposed (para 93). It made no difference that the money went to recipients other than the Consolidated Fund, or that accounting practice would show the payments as expenses (para 94).
The £554,000 paid to mis-sold customers was not treated differently: it was part of a package negotiated under the threat of a penalty and was as much a punishment as the rest (para 99). HMRC’s appeal was allowed and the Upper Tribunal’s decision restored (para 100).
Why it matters
- Settlement does not make a punitive payment deductible. Payments agreed with a regulator in place of a penalty, and sufficiently akin to one, are treated like the penalty: not deductible. Substance, not the label on the settlement, decides (paras 89, 94).
- The customer payments here shared the package’s punitive character. Even the sums paid to customers directly affected by mis-selling were not deductible: on these facts the Court saw them as part of the deal struck to avoid a penalty, not as damages (para 99).
- A clearer legal basis. The rule against deducting penalties rests on section 54(1)(a) itself, not on a narrow judge-made adjustment confined to payments that are strictly penalties (paras 81, 85). In our view the reasoning is likely to be relied on for settlements with other regulators too.
- Putting things right is a separate question. The Court did not decide whether separate spending to fix systems or comply with the rules is deductible; where the line falls between that and payments made to appease the regulator is for HMRC and, if disputed, the tribunal (para 95). Nor did it help that some failings were close to unavoidable: culpability had already been reflected in the amounts (paras 96–97).
- Legal costs were not in issue. The Court did not revisit whether the costs of resisting regulatory or disciplinary proceedings are deductible, the point decided in favour of the taxpayer, on its facts, in McKnight (paras 61, 80).
Free to search across 25 official UK databases — no account needed. Explore the authorities behind this case:
Read the full judgment: ScottishPower (SCPL) Limited and others v HMRC [2026] UKSC 35 (The National Archives).