The Court of Appeal has handed down judgment in ScottishPower (SCPL) Limited & Ors v HMRC [2025] EWCA Civ 3, in which Laura Inglis appeared for the successful taxpayer. The decision addresses important questions on the deductibility of settlement payments brokered by industry regulators.
Various members of the Scottish Power group were found by GEMA, the regulator for gas and electricity suppliers, to have breached certain of their licence conditions. Although GEMA was initially minded to impose substantial penalties, Scottish Power agreed with GEMA to improve its compliance and to make substantial redress payments to customers and consumer charities, as a result of which GEMA agreed to impose only nominal penalties. Scottish Power subsequently sought to deduct the redress payments (but not the nominal penalties) for corporation tax purposes, but HMRC denied the deductions on the basis that the redress payments were in lieu of penalties.
The Court of Appeal affirmed the existence of a rule against the deduction of statutory fines and penalties, deriving from Commissioners of Inland Revenue v Alexander von Glehn [1920] 2 KB 553 (CA) and explained by Lord Hoffmann in McKnight v Sheppard [1999] 1 WLR 1333. However, it also confirmed that these authorities said nothing at all about the deductibility of payments “in lieu” of penalties. Nor was there any rule of policy prohibiting such a deduction. In light of the FTT’s findings that the redress payments were wholly and exclusively incurred for the purposes of Scottish Power’s trade, there was no barrier to deductibility.
Laura appeared for Scottish Power, led by David Goldberg KC and instructed by Linklaters LLP.