ScottishPower (SCPL) Limited and others v HMRC
Main summary
The Supreme Court unanimously held that approximately £28 million of payments made by ScottishPower to customers under regulatory settlements were not deductible for corporation tax purposes.
It allowed HMRC’s appeal and restored the Upper Tribunal’s decision.
The Supreme Court confirmed the basic principle that penalties and fines are not tax deductible because they are not incurred for the purpose of the trade but are punishments because of the wrongs that the taxpayer has committed. The Supreme Court was of the unanimous view that redress payments, which the company had agreed to pay in order to prevent a penalty being imposed, should also be disallowed on the same principle as they were sufficiently akin to penalties.
The payments settled four Ofgem investigations into mis-selling, differences in charges between payment methods, energy-saving obligations and complaints handling. ScottishPower agreed to make substantial redress payments, together with a nominal £1 penalty under each settlement, instead of facing substantial financial penalties. It argued that the redress payments were deductible because they were not formal fines or penalties.
The Court of Appeal had allowed deductions for all the disputed redress payments. It treated the restriction on deducting penalties as a judge-made rule and declined to extend that rule to payments that were not themselves penalties, considering any wider restriction a matter for Parliament.
However, the Supreme Court rejected this approach and this decision closes the door on any arguments that something which has the character of a penalty, but which is not actually described as a penalty, can be tax deductible.
Comments
Oil companies may face regulatory fines or penalties for breaches of e.g. licencing conditions, flaring and venting consents, environmental requirements and decommissioning obligations.
- This Supreme Court decision makes it clear that regulatory settlement payments may be non-deductible even where they are not formally described as fines or penalties.
- Genuine expenditure on correcting operational failures requires separate consideration. There is however no blanket tax deduction restriction on every payment connected with regulatory failings, proper analysis is therefore needed.