Supreme Court denies tax relief for £28m energy redress in lieu of penalty

The Supreme Court has held that about £28 million of consumer redress ScottishPower paid under four enforcement settlements with the energy regulator is not deductibleNationalarchives in computing trade profits for corporation taxNationalarchives. The unanimous judgment dated 21 October 2026 allows HMRC’s appealNationalarchives in ScottishPower (SCPL) Limited and others v Commissioners for His Majesty’s Revenue and Customs [2026] UKSC 35 and restores the Upper Tribunal’s decision denying relief for the whole sumNationalarchives.

The payments settled four investigations by the Gas and Electricity Markets Authority, acting through Ofgem, into breaches by ScottishPower Energy Retail Limited as a licensed gas and electricity supplier. For misleading doorstep and telesales practices contrary to supply licence condition 25, the group paid £8.5 million to vulnerable customers, affected customers and the ScottishPower Energy People Trust. For breach of the cost-reflectivity rule on payment-method differentials in condition 27.2A, it paid £750,000 to the Citizens Advice Energy Best Deal Extra campaign. For failure by all four respondents to meet Community Energy Saving Programme Order targets, outsourced to Carillion, it paid £2.4 million to the same trust. For billing and complaints-handling failures under condition 25C, condition 27.17 and the Consumer Complaints Handling Standards Regulations, it paid £18 million, with up to £15 million in £50 to £150 payments to delayed-bill and complainant customers and the balance to charities. In each settlement a nominal £1 penalty was imposed and a published Notice of Decision recorded admitted breaches.

The First-tier Tribunal had allowed deduction for £554,013 paid directly to mis-selling customers as compensation and denied the rest. The Upper Tribunal denied deduction for the whole £28 million as a penalty-substitute packageNationalarchives. The Court of Appeal in [2025] EWCA Civ 3 had allowed deduction for all of it, treating non-deductibility of penalties as a narrow judge-made adjustment under section 46(1) of the Corporation Tax Act 2009 that should not extend to sums that are not formally penalties.

The Supreme Court, in reasons given by Lady Rose and Lord Doherty with whom Lord Reed, Lord Stephens and Lady Simler agreed, rejected that analysisNationalarchives. Penalties are not deductible because they are not incurred wholly and exclusively for the purposes of the trade within section 54(1)(a) of the Corporation Tax Act 2009Nationalarchives. They punish the taxpayer for wrongs committed in conducting the trade and deter repetition; the taxpayer’s purpose in paying is to answer for breach, not to earn profits. Accounting treatment and commercial motives for settling do not change that character.

The redress here, though paid to customers and charities rather than into the Consolidated Fund, was in substance of the same characterNationalarchives. The Tribunal found that without settlement a penalty of the same order would have been imposedNationalarchives and that settlement required admission of breach and surrender of appeal rights. The Supreme Court held that each published Notice of Decision linked the payment to a penalty that was otherwise warranted and calibrated for seriousness, gain, detriment and deterrence. That holds even for the £554,013 paid to directly affected customers: it formed part of the overall penalty-avoidance package, not standalone compensation. Licence conditions are statutory obligations, not private contracts whose breach sounds in deductible damages.

Companies under statutory enforcement should therefore treat redress agreed under threat of a regulator penalty as non-deductible to the same extent as the penalty avoided.Nationalarchives The Court added that a regulator cannot be expected to gross up redress to offset a tax deduction the company may or may not claim.

Legal basis: Corporation Tax Act 2009, sections 46(1) and 54(1)(a); Electricity Act 1989, sections 25, 27A and 27B.