ScottishPower: Supreme Court clarifies tax treatment of regulatory settlement payments

On 21 October 2026, the Supreme Court (the Court) handed down its judgment in the ScottishPower case. Ruling in favour of HM Revenue and Customs (HMRC), the Court held that 'Redress Payments' made by ScottishPower (SCPL) Limited (ScottishPower) to its customers (and others) pursuant to regulatory settlement agreements were not incurred 'wholly and exclusively for the purposes of a trade', and so were not deductible for corporation tax purposes.

The judgment confirms that, regardless of who receives them, how they are structured, and the label they are given, payments sufficiently akin to a regulatory penalty will not be deductible for corporation tax purposes.

The judgment is available here: ScottishPower (SCPL) Limited and others (Respondents) v Commissioners for His Majesty’s Revenue and Customs (Appellant) [2026] UKSC 35.

Speedread

The Supreme Court has held that £28 million paid by ScottishPower under regulatory settlement agreements were not deductible for corporation tax purposes.

Although the payments were made to customers and charities, rather than paid to the regulator as formal fines, the Court held that they were sufficiently akin to penalties because they were made to resolve serious regulatory breaches and would otherwise have been reflected in fines of the same or similar amounts.

The Court confirmed that the non-deductibility of fines and penalties follows directly from the statutory requirement that expenses must be incurred wholly and exclusively for the purposes of the trade to be allowable. It is the substance of a payment (not its form) that will determine its tax treatment.

The decision has implications for businesses in regulated sectors when negotiating or documenting settlements with regulators. They should take tax advice at an early stage and review whether deductions have been claimed for historical regulatory settlement payments or comparable amounts.

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How did it come to this?

ScottishPower held gas and electricity supply licences. Ofgem, acting on behalf of the Gas and Electricity Markets Authority (GEMA), investigated ScottishPower for serious breaches of ScottishPower's regulatory obligations covering:

mis-selling and other inappropriate sales practices;
complaints handling procedures;
ensuring pricing differentials between payment methods reflected relative costs; and
carbon emissions reduction obligations (under the Community Energy Savings Programme Order 2009).

ScottishPower admitted breach in each case. GEMA had the power to impose substantial fines but instead reached a settlement agreement with ScottishPower. Under the agreement, ScottishPower agreed to pay a nominal fine of £1 to settle each breach, in addition to payments to consumers and charities totalling approximately £28m (the Redress Payments).

ScottishPower treated those payments as deductible expenses in computing its taxable trading profits. HMRC denied the deduction. The case has worked its way up from the First-tier Tribunal, through the Upper Tribunal and the Court of Appeal, to reach the Supreme Court. The Court of Appeal had agreed with ScottishPower and allowed the company to deduct the Redress Payments in full.

In a unanimous ruling, the Court has reversed that decision, concluding that none of the payments were deductible.

Why does it matter?

A company's taxable profits must be calculated in accordance with generally accepted accounting practice (GAAP). However, tax law can adjust that position because it states that "no deduction is allowed for expenses not incurred wholly and exclusively for the purposes of the trade". That is, only expenses incurred wholly and exclusively for the purposes of the trade (WEPT) can be treated as deductible when calculating taxable profit.

The case hinged on the rationale for, and breadth of, the concept of WEPT expenses. It was accepted that statutory fines and penalties are not deductible, whereas compensation paid to customers and damages paid for breaches of contract will normally be allowed as WEPT expenses.

The judgment is important because the Court concludes, agreeing with HMRC, that the legal basis for the non-deductibility of statutory fines and penalties arises directly from the tax legislation on WEPT expenses.The consequence is that the concept of WEPT expenses can be extended more broadly to deny the deductibility of payments (such as the Redress Payments) made in lieu of fines under settlement agreements with regulatory bodies.

Why did the Court rule in HMRC's favour?

The issue in the case arose because, in essence, ScottishPower argued that the Redress Payments were not fines and penalties and were instead more akin to compensation. HMRC, understandably, took the opposite view.

ScottishPower's argument was that the rule treating statutory fines as non-deductible had been developed by case-law. On that basis, it argued it must be construed narrowly to extend only to payments formally imposed as regulatory fines paid to regulatory bodies and could not be extended to other payments made to customers (and other third parties) pursuant to an agreement to settle regulatory breaches. According to ScottishPower, it followed that the Redress Payments were not 'fines' and could, indeed should, be treated as WEPT.

The Court disagreed. It held that penalties are not deductible because of their nature, because they are not WEPT, and not because of a separate, narrowly construed, rule developed by case-law.

Delivering the lead judgment, Lady Rose and Lord Doherty stated:

"the reason [penalties] are not deductible is that they are not incurred for the purposes of the trade. They represent expenditure of a very different nature. They are punishments imposed because of wrongs which the taxpayer has committed. Their object is to punish the offender and to deter him and others from engaging in such behaviour. The taxpayer's object in paying the penalty is not to carry on the trade, but to answer for his breach." [81]

The question then arises whether the Redress Payments under the settlement agreement were akin to penalties (and so not deductible). The Court found no difficulty in concluding that they were. At their core, ScottishPower's arguments were that the Redress Payments were WEPT and deductible because they were either:

(a) voluntary (because they were not compelled to enter the settlement agreements) and so could not be penalties. The Court accepted that point but concluded that, on the facts, the Redress Payments should not be characterised as voluntary. Whilst ScottishPower was not compelled to make the Redress Payments, "if it had not done so, it would have faced fines of the same or similar amounts"; or

(b) akin to payments of compensation for a breach of contract. The Court rejected that argument, concluding that the licence granted by GEMA to ScottishPower to supply electricity imposes statutory obligations, and that it was not right to see that as like a contract.

The Court concluded that "the nature of the Redress Payments is that [none were] incurred for the purposes of the trade" and allowed HMRC's appeal. The Redress Payments were sufficiently akin to penalties for it to be clear that they were not expenditure incurred for the purposes of ScottishPower’s trade. Instead, they were made to avoid the imposition of substantial penalties.

So what?

The case has relevance to any business operating in any regulated sector that is subject to the possible imposition of regulatory or statutory penalties. Alongside energy companies, businesses in banking, telecommunications and other utilities will, for example, also be impacted by the Court's judgment.

From a tax perspective, it is a little surprising that the case reached the Supreme Court. The concept of WEPT expenses is a fundamental component of how the taxable profits of a trade are calculated. The basic principle at work is that the cost incurred in making sales should be allowed as an expense and deductible when calculating profit subject to tax.

It follows that fines and penalties, incurred for breaching obligations that guide or constrain the operation of a trade, are not incurred for the purpose of that trade (even if they are incurred in the course of it). As the Court observed, referencing Lord Hoffmann, "it would be unfair to the public for the taxpayer to be able to share the financial burden of the penalty with them, or, to put it another way, that it would dilute the effect of the penalty if it was not subject to tax."

The case is instructive, however, because it puts beyond doubt that payments that are akin to, or made in lieu of, fines and penalties are equally incapable of being WEPT. To conclude otherwise would mean that changing the label of a payment, by entering into a settlement agreement to avoid the payment of a fine or agreeing to pay an amount to a different recipient, could change the nature of that payment for tax purposes. That is clearly an undesirable position to reach.

That said, the dividing line between what is deductible, and what is not, is rarely clear-cut. What, for example, would have been the position if ScottishPower had made compensatory payments to customers before or during the investigation? As the Court observed, "there may be cases where there is a difficult dividing line to draw between sums expended at the close of the investigation and sums expended to pre-empt or appease the regulator at an earlier stage". ScottishPower was not a case where that dividing line needed to be drawn, but it could be the subject of a future case.

As ever, much will depend on the facts and circumstances in any given scenario. Impacted businesses are encouraged to:

Obtain tax advice early in connection with any regulatory investigation
Review any prior tax returns where deductions have been claimed for regulatory settlement payments (or payments of a similar character)
Not assume payments made pursuant (or in relation) to an investigation or settlement agreement will be allowable for tax purposes

How we can help

Regulated businesses across all sectors need to understand the implications of this ruling. We can advise businesses facing regulatory investigations, enforcement action, and settlements, and on the full tax consequences of how those matters are resolved. Our tax team works alongside our regulatory and disputes practices, so we can advise on the broader interaction between your regulatory obligations and your tax profile.

For more information on this topic, or to discuss how this ruling affects your business, please contact a member of our tax team.

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