HMRC v ScottishPower: UK Supreme Court hears landmark case on deductibility of regulatory settlement payments

The Supreme Court heard oral argument on 18-19 May 2026 in HMRC v ScottishPower (UKSC/2025/0047), a case with potentially far-reaching implications for the UK corporation tax treatment of payments made in settlement of regulatory investigations. The panel – comprising Lord Reed, Lord Stephens, Lady Rose, Lady Simler and Lord Doherty – has reserved judgment.

Background
ScottishPower's energy supply and generation businesses were the subject of four Ofgem investigations between 2010 and 2014, concerning mis-selling, costs reflectivity, compliance with the so-called Community Energy Savings Programme and complaints handling. Each investigation was resolved by way of a settlement agreement with the Gas and Electricity Markets Authority (GEMA), under which ScottishPower agreed to make substantial payments – totalling approximately £28 million – to consumers, consumer organisations and charities. Only nominal statutory penalties were imposed. ScottishPower sought to deduct the £28 million as trading expenses for UK corporation tax purposes. HMRC denied the deductions.

The First-tier Tribunal found that the payments met the basic statutory requirement of being incurred “wholly and exclusively” for the purposes of the trade. However, it ultimately sided with HMRC on the basis that the payments were (for the most part) made in lieu of statutory penalties, meaning their deduction was prohibited by a public policy principle against the UK corporation tax deductibility of penalties or payments in lieu thereof. The Upper Tribunal largely agreed, finding that, because all of the payments were punitive in nature, none was deductible. However, the Court of Appeal unanimously reversed those decisions, holding that, as the payments were not statutory fines or penalties, and the rule against the deductibility of fines and penalties did not extend beyond statutory fines or penalties, no rule of law prevented their deduction. HMRC appealed against that decision to the Supreme Court.

The key issues
At the heart of the case is the scope of the long-established rule (originating in CIR v Alexander von Glehn & Co Ltd [1920] 2 KB 553 and explained by the House of Lords in McKnight v Sheppard [1999] 1 WLR 1333) that fines and penalties imposed under statutory (and potentially also non-statutory) regimes are non-deductible in computing trading profits for UK corporation tax purposes. The Supreme Court is expected to consider the following questions:

• What is the legal basis of the rule? Is it an application of the "wholly and exclusively" test in section 54(1)(a) CTA 2009, a freestanding judge-made adjustment given effect under section 46(1) CTA 2009, or an expression of a broader public policy principle that the burden of a punishment should not be shared with the general body of taxpayers?
• Does the rule extend beyond formal statutory penalties? HMRC argue that it must catch statutory and non-statutory fines and penalties, together with payments made in lieu of such fines and penalties which, though not labelled as such, are punitive in nature, in the character of deterrence, and negotiated as a direct substitute. ScottishPower contend that no authority supports extending the rule beyond payments that are, as a matter of legal fact, statutory fines or penalties, and that any such extension would create unacceptable uncertainty.
• If the rule is to be read into section 54(1) CTA 2009, whose purpose matters? The Court of Appeal observed that section 54(1)(a) CTA 2009 focuses on the taxpayer's purpose in incurring expenditure, and not a regulator's objectives in imposing a particular form of settlement upon a taxpayer. HMRC challenge that analysis, relying on Mallalieu v Drummond, arguing that the inherently punitive character of a payment can itself establish a non-trading purpose regardless of subjective intention.

Implications for taxpayers
The Supreme Court's decision (expected to be handed down later this year) could have significant practical consequences for businesses operating in regulated sectors. If the Supreme Court sides with HMRC and holds that settlement payments made in lieu of statutory penalties are (or may in certain circumstances be) non-deductible, regulated businesses will need to be mindful of that when negotiating settlements with regulators. Conversely, if the Court of Appeal's decision is upheld, it will confirm a potentially more favourable path: that payments directed to consumers or third parties as part of a regulatory settlement, rather than to the state as a statutory penalty, may be deductible provided they satisfy the “wholly and exclusively” test.

We will publish a further update once the Supreme Court hands down its judgment.  

If you would like to discuss any of the points raised in this blog post, please contact the authors or your usual Freshfields contact.