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The recent Court of Appeal decision in Scottishpower (SCPL) Ltd and others v HMRC [2025] has made it easier for companies to obtain a corporation tax deduction for certain redress payments made as part of settlements of regulatory matters. This goes against the long-accepted principle that payments made in the nature of fines and penalties are generally not deductible from a company’s taxable profits.
Background and decision
Scottishpower was the subject of regulatory investigations by Ofgem. Rather than paying the substantial penalties which were recommended by the Gas and Electricity Markets Authority, it was instead agreed that Scottishpower would pay a nominal £1 penalty plus a number of significant redress payments to consumers and consumer organisations (including charities), the total of which was around £28m.
Scottishpower sought to deduct the £28m when computing its taxable profits. Although the sums were accepted as revenue-related items capable of deduction, HMRC denied the deduction under the general principle (deriving from the case of Inland Revenue v Alexander von Glehn & Co. Ltd [1920]) that, even where a penalty or fine was incurred in the course of trading activities, the sum is not deductible in computing trading profits if incurred under a statutory regime.
HMRC argued that the sums paid by Scottishpower should not be deductible because they were in effect punitive (they replaced the penalties which the Gas and Electricity Markets Authority otherwise would have levied). However, the Court was not persuaded by this argument. Further, the principle in von Glehn could not simply be extended to payments which were not as a matter of fact fines and penalties (which the payments in this case were not). The Court had no authority to make an extension to the scope of the von Glehn principle (even where the payments in question were effectively replacing a penalty or equal value to a penalty). Therefore, the Court concluded that the von Glehn principle could not be used to deny a deduction for these payments made in lieu of statutory penalties.
Significance
It should be noted that the decision of the Court of Appeal may well be appealed by HMRC (both the First Tier Tribunal and the Upper Tribunal reached different decisions, so there has not been a consensus on the point). However, clients in sectors where regulatory penalties are relevant may wish to explore whether previous fines and penalties are deductible, and structure any ongoing or future liabilities under a settlement with a regulator followed by redress payments where commercially feasible, as such payments stand a better chance of being tax-deductible. Clients should also bear in mind the underlying basic rule that a deduction will be denied unless the payment is made wholly and exclusively for the purposes of a trade.
This article is for information purposes only and is not a substitute for tax or legal advice, and should not be relied upon as such. Please contact Anthony Reeves or Cathy Bryant if you have any queries on the above or corporate tax issues generally.
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