UK Supreme Court denies deduction for regulatory redress

Redress paid instead of penalties

ScottishPower Energy Retail Limited made the payments to customers and charities under four settlements following investigations by the Gas and Electricity Markets Authority and Ofgem into breaches of energy-sector obligations. Each settlement paired the redress with a nominal £1 fine. The case concerned whether those payments could be deducted when computing the group's trading profits; ScottishPower accepted that a substantial fine itself would not have been deductible.^[1][2]

The Court restored the Upper Tribunal's decision and denied the deduction for all the redress, including £554,013 paid to consumers directly affected by mis-selling. It treated the settlements as an overall package negotiated under the threat of penalties, rather than separating the apparently compensatory element from the other payments.^[1][2]

The section 54 test

Section 54(1)(a) of the Corporation Tax Act 2009 disallows expenditure that is not incurred wholly and exclusively for the purposes of the trade. The Supreme Court held that penalties fall outside that test because their purpose is to satisfy a legal obligation arising from the taxpayer's infringement, not to carry on the trade. It rejected the Court of Appeal's alternative analysis that non-deductibility arose from a separate judge-made adjustment to accounting profits.^[1][3]

Applying that statutory analysis, the Court found the redress sufficiently akin to penalties: ScottishPower paid it to avoid substantial financial penalties that the regulator would otherwise have imposed. Payment to customers or charities rather than the Consolidated Fund, and recognition as an expense under generally accepted accounting practice, did not change its nature for section 54 purposes.^[1]

Implications for regulated groups

The judgment does not say that every customer-compensation or remediation payment is non-deductible. It turns on the direct connection between these decision notices, admitted regulatory breaches and the penalties avoided. The Court acknowledged that harder boundary cases may arise where expenditure is incurred earlier to pre-empt or appease a regulator; HMRC must assess the facts and a tribunal can determine any challenge. Groups should therefore preserve settlement negotiations, regulatory notices and allocation evidence, and test the substantive purpose of each payment rather than relying on its accounting label or recipient.^[1]