ScottishPower wins on non-penalties after extra time: Court of Appeal clarifies the tax-deductibility of consumer redress payments

In ScottishPower (SCPL) Limited & Ors v The Commissioners for His Majesty’s Revenue and Customs [2025] EWCA Civ 3, the Court considered whether redress payments made to consumers and charities (where those payments were alleged by HMRC to be in lieu of financial penalties following the settlement of regulatory investigations) were deductible when computing a company’s taxable profits. 

Finding in favour of the Appellants, ScottishPower, and overturning the decision of the Upper Tribunal, the Court of Appeal held that the long-established rule which prevents the deduction of financial penalties does not extend to the redress payments that ScottishPower made to its consumers and certain charities, thereby overturning the disallowance of deductions claimed by ScottishPower nearly a decade ago.

David Goldberg KC and Laura Inglis, instructed by Linklaters LLP, acted for the Appellants, ScottishPower.

Background

Between 2013 and 2016, ScottishPower entered into four settlement agreements with the Gas and Electricity Markets Authority (“GEMA”). These agreements followed the conclusion of regulatory investigations into purported breaches of ScottishPower’s licence to generate and supply gas and electricity. The settlement agreements (the outline terms of which were publicised by GEMA) provided that ScottishPower was to pay a nominal £1 penalty in each case. The amount that was levied by the regulator was set at this level for various reasons, including the fact that ScottishPower had made significant improvements to its internal processes and had volunteered to pay several million pounds to impacted customers and charities as part of the settlements.

Thereafter, when submitting its tax returns for the relevant period, ScottishPower sought to deduct the sums paid to impacted customers and charities from its revenue for the purposes of computing the profits of its trade for United Kingdom corporation tax purposes. However, HMRC, rejected that approach. HMRC argued that, in reliance on the case of McKnight (HM Inspector of Taxes) v Sheppard [1999] 1 WLR 1333, penalties were not tax deductible, and that by extension payments made to consumers in the nature of, or in lieu of, penalties should be similarly non-deductible.

HMRC were successful at the Upper Tribunal and ScottishPower therefore appealed to the Court of Appeal, arguing (among other things) that: (i) McKnight v Sheppard did not establish a rule of law that payments made ‘in lieu of’ penalties were precluded from deduction; (ii) the payments in this case were not penalties in form or substance; and (iii) the correct test is simply whether these expenses were deductible in accordance with ordinary principles of commercial accountancy and were incurred “wholly and exclusively for the purposes of the trade”, which the First Tier Tribunal found that they were.

Decision of the Court of Appeal

A Court of Appeal panel comprising Lady Justice Falk, Lord Justice Snowden, and Lord Justice Zacaroli allowed ScottishPower’s appeal. The Court held that the redress payments made to consumers were not penalties and that there was no rule of law which prevented them from being otherwise deductible. 

Falk LJ, writing the lead judgment, referred to the fact that the prohibition on the deduction of penalties established by the Court of Appeal in Commissioners of Inland Revenue v Alexander von Glehn & Co. Ltd [1920] 2 KB 553 (and further explained in McKnight v Sheppard) was founded on the basis that the “legislative policy [of the penalty regime] would be diluted if the taxpayer were allowed to share the burden with the rest of the community by a deduction for the purposes of tax”.

However, Falk LJ noted that there was no authority to support an argument that this rule extends to amounts which are not fines or penalties, and that the scope of any such extension would be “highly uncertain”. Further, no general considerations of policy require the prohibition sought by HMRC and the development of such a rule would properly be a matter for Parliament, not the courts. 

The Court of Appeal’s judgment therefore provides helpful clarity for those operating within a regulated sector. 

ScottishPower was represented by Linklaters in this appeal. Should you have any questions about this judgment and how it may affect your business, please contact Rory Conway (Partner, Litigation, Arbitration and Investigations) and Sam Lintonbon (Partner, Tax).