Should an energy business that compensates consumers to settle regulatory investigations be penalised twice, once by the regulator and once by the tax system? That is the question the Supreme Court must answer in HMRC v ScottishPower.
Oral argument took place on 18 - 19 May 2026 before Lord Reed, Lord Stephens, Lady Rose, Lady Simler and Lord Doherty, who have reserved judgment.
What is the issue?
ScottishPower is a supplier and generator of electricity and gas. It is regulated by the Gas and Electricity Markets Authority (GEMA), whose day-to-day work is carried out by the Office of Gas and Electricity Markets (Ofgem).
Between 2013 and 2016, ScottishPower reached settlement with GEMA in respect of various investigations undertaken by Ofgem into matters such as mis-selling, complaints handling, and costs transparency. Under this settlement, ScottishPower paid consumers and consumer organisations around £28 million, in addition to paying nominal penalties.
ScottishPower sought to treat this aggregate £28 million amount as a trading deduction. HMRC maintains that this $28 million amount cannot be deducted from ScottishPower’s profits for tax purposes.
The First-Tier Tribunal largely agreed with HMRC. On appeal, the Upper Tribunal sided wholly with HMRC. The Court of Appeal disagreed with both tribunals and ruled entirely in favour of ScottishPower.
Applying the principles in McKnight v Sheppard and CIR v Alexander von Glehn & Co Ltd, the Court of Appeal confirmed that fines and penalties cannot be deducted as trading expenses due to their punitive nature. It held, however, that where a taxpayer makes a payment to avoid a penalty such as the settlement payments in question, then that payment may be deductible provided it is made in the course of its trade and is wholly and exclusively for the purpose of that trade.
Why does this matter for taxpayers?
The Supreme Court is expected to hand down its judgment in due course, and the outcome has the potential to reshape the corporation tax treatment of regulatory settlement payments, with particular significance for the energy sector and other regulated industries.
GEMA's broad statutory powers enable it to enter into settlement agreements with energy companies pursuant to which those companies make customer redress payments. If such payments are deductible, the resulting reduction in the post-tax cost could be material, particularly where significant amounts are involved. This will also likely be an important factor for businesses when considering whether to settle early with regulatory bodies such as GEMA and on what terms.
However, if the Supreme Court holds that settlement payments made in lieu of statutory penalties are, or in certain circumstances could be, non-deductible, and rules against ScottishPower, then regulated business would need to factor the additional tax cost into any future settlement negotiations.
Other key contacts: Shayaan Zaraq Bari, Senior Associate
