Court of Appeal Sides with ScottishPower in £28 Million Tax Dispute with HMRC

In a significant victory for ScottishPower, the Court of Appeal has overturned a previous ruling by the Upper Tribunal, allowing the energy company to deduct £28 million in payments from its corporation tax. This decision highlights the complex nature of tax law, especially regarding payments made to settle regulatory investigations. The ruling clarifies the distinction between penalties and deductible trading expenses, and has important implications for businesses in the UK.

ScottishPower v HMRC

The dispute arose from regulatory investigations by Ofgem, which found that companies within the ScottishPower group had breached regulations between 2013 and 2016. These breaches included issues related to mis-selling, cost-reflectivity, energy saving, and complaints handling. To settle these investigations, ScottishPower agreed to make payments to consumers, consumer organisations, and charities, totalling around £28 million, instead of facing substantial penalties.

HMRC’s Initial Stance

HMRC rejected ScottishPower’s attempt to deduct these payments for corporation tax purposes, arguing that they were essentially penalties and therefore not tax deductible. HMRC amended the taxpayers’ corporation tax returns accordingly.

First-Tier Tribunal (FTT) Ruling

The case was initially heard at the First-Tier Tribunal (FTT) in 2021, which largely sided with HMRC, ruling that the payments were non-deductible, except for one payment of £554,000 which was deemed to be compensation. This sum was to be paid to consumers directly affected by the mis-selling. ScottishPower appealed this decision.

Download First-tier Tribunal Judgment Here

Upper Tribunal Decision

In 2023, the Upper Tribunal dismissed ScottishPower’s appeal and ruled in favour of HMRC, regarding the £554,000 payment, rendering it non-deductible. This ruling further solidified the view that the payments were, in effect, penalties.

Download Upper Tribunal Judgment Here

Court of Appeal Decision

On Friday, 17 January 2025, the Court of Appeal overturned the Upper Tribunal’s decision, ruling in favour of ScottishPower. The court held that the payments were not penalties but were made to settle regulatory investigations, thus qualifying as deductible trading expenses. Lady Justice Falk stated that the payments were made in the course of trade and were deducted in computing profits according to commercial accounting principles. The court emphasised that the nature of the payment, not its purpose, was the crucial factor. The ruling clarified that the von Glehn principle, which prevents the deduction of penalties, does not apply to payments made in lieu of penalties.

Lady Justice Falk, writing the lead judgment, noted that the prohibition on the deduction of penalties established in Commissioners of Inland Revenue v Alexander von Glehn & Co. Ltd [1920] 2 KB 553, as explained in McKnight (HM Inspector of Taxes) v Sheppard [1999] 1 WLR 1333, was based on the principle that the “legislative policy [of the penalty regime] would be diluted if the taxpayer were allowed to share the burden with the rest of the community by a deduction for the purposes of tax.” However, Falk LJ clarified that this principle does not extend to payments which are not fines or penalties. The court emphasised that the scope of any extension to the rule would be highly uncertain and should be a matter for Parliament, not the courts.

Key Points of the Court of Appeal Ruling

  • The court distinguished between penalties and payments made to settle regulatory investigations.
  • The nature of the payment, rather than its purpose, was deemed crucial for tax deductibility.
  • The von Glehn principle specifically applies to penalties and not to payments in lieu of penalties.
  • The court found that the payments were made in the course of trade and were deductible according to commercial accounting principles.

This ruling provides clarity for companies regarding the tax treatment of payments made to settle regulatory investigations. It underscores the importance of analysing the character of payments rather than their intended purpose when determining tax deductibility. Companies need to consider potential tax implications when negotiating settlements with regulators.

Download the Judgment Here

The £554,000 Payment

The First-Tier Tribunal initially considered a payment of £554,013 to be compensatory as it went directly to affected consumers. The Upper Tribunal disagreed, and then the Court of Appeal did not distinguish this payment as different from the other payments, which were all made in lieu of penalties.

Expert London Tax Litigation Lawyers

Navigating tax disputes with HMRC can be complex and stressful. Our team of expert tax solicitors and barristers can provide specialised advice and representation in all areas of tax law. We can assist with:

  • Understanding your tax obligations and applicable rules for your specific circumstances.
  • Challenging HMRC decisions through the appropriate channels.
  • Negotiating with HMRC to seek a favourable resolution.
  • Representing you in tax tribunals and courts to protect your interests.

Our experienced team has a track record of successfully challenging HMRC decisions and securing optimal outcomes for clients. We understand the intricacies of tax law and are committed to providing robust and strategic legal advice. Contact us today for a consultation to discuss your case.

Specialist Tax Dispute Advice

If you need HMRC Tax Disputes advice, we are available to aid you at every stage of the HMRC appeals process. Members of our legal team have first-hand experience and working knowledge of the internal workings of HMRC. We can provide you with the very best representation in negotiations, throughout the HMRC internal review process and in front of the Tax Tribunal. Our team specialises in successfully challenging HMRC decisions and will assist you in every aspect including developing a strategy.

We are experts in adeptly presenting evidence and employing bespoke arguments combining the facts of your case, previous cases and current legislation to ensure your appeal is a successful one. We provide urgent advice and representation to clients from our unique expert team of established tax and duties specialist solicitors and barristers with a proven track record of delivering authoritative results. Just call us on 0207 1830 529, or email [email protected].

Want legal advice from Tax Solicitors on your case?

Our simple enquiry form goes immediately to our tax litigators in Middle Temple, London. Call us on +442071830529 from 9am-6pm.

Call Now Button search previous next tag category expand menu location phone mail time cart zoom edit close