ScottishPower has lost a Supreme Court tax case over about £28 million it paid to customers and charities to settle investigations by the energy regulator. On 21 October 2026 the UK’s highest court unanimously sided with HMRC, ruling that the redress payments cannot be deducted when working out the energy group’s taxable profits for corporation tax.
The judgment, ScottishPower (SCPL) Ltd and others v HMRC [2026] UKSC 35, overturns a Court of Appeal ruling in the company’s favour and restores an earlier decision of the Upper Tribunal.
What the case was about
Between 2013 and 2016, Ofgem investigated ScottishPower Energy Retail Ltd, which supplied gas and electricity to households, on behalf of the Gas and Electricity Markets Authority. According to the Supreme Court’s press summary, the regulator found serious breaches relating to marketing, complaints handling, the costs of different payment methods and obligations under a carbon emissions reduction scheme.
Instead of imposing large fines, the regulator agreed settlements. Under them, the company paid around £28 million in redress payments to customers, consumer organisations and charities, and a nominal penalty of £1 under each settlement. ScottishPower, which is owned by the Spanish utility Iberdrola, then sought to deduct the redress payments from its profits for tax purposes. HMRC refused.
How the case reached the Supreme Court
The dispute went through four levels of court and tribunal:
- First-tier Tribunal: agreed with HMRC on most of the payments but allowed £554,013 as deductible because it was compensatory.
- Upper Tribunal: held that none of the payments was deductible, treating them as an overall package agreed under the threat of penalties.
- Court of Appeal (January 2025): found for ScottishPower, holding that the bar on deducting penalties was a judge-made rule and that extending it to payments made instead of penalties was a matter for Parliament.
- Supreme Court: heard HMRC’s appeal in May 2026 during the court’s sitting in Glasgow, according to the University of Edinburgh, and allowed it.
Why the Supreme Court ruled for HMRC
Lady Rose and Lord Doherty gave the judgment, with which Lord Reed, Lord Stephens and Lady Simler agreed. The court said the reason penalties cannot be deducted lies in the ordinary test in section 54(1)(a) of the Corporation Tax Act 2009, which allows deductions only for expenses incurred wholly and exclusively for the purposes of the trade. A business paying a penalty is meeting a legal liability arising from its wrongdoing, not carrying on its trade. In the words of the court’s press summary, penalties are excluded under that test, “not because there is a judge-made rule that they are not deductible.”
Applying that test, the justices found the redress payments were close enough in character to penalties to fail it as well. They gave several reasons:
- The payments were not genuinely voluntary, because they were made to avoid substantial penalties.
- Allowing a tax deduction for settlements, but not for penalties, would be unfair to companies that choose to contest a penalty, and would give firms a reason to prefer one route over the other.
- The breaches concerned statutory duties and licence conditions, so the payments were not comparable to ordinary damages for breach of contract.
- The payments to customers could not be separated from the rest of the deal, because everything formed part of one negotiated settlement.
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What the parties said
An HMRC spokesperson welcomed the ruling, telling City AM it confirmed the department’s long-held view that “penalties and payments of this nature cannot be deducted when calculating taxable profits”. A ScottishPower spokesperson said only that the company noted the decision.
Why the ScottishPower Supreme Court ruling matters
The case did not change what ScottishPower’s customers received: the redress was paid years ago. Its importance lies in how businesses in regulated sectors, such as energy, water and financial services, treat money they pay to settle enforcement action. Settlements that include payments to customers or good causes are a common way for regulators to resolve investigations, and the ruling means companies cannot expect to reduce their tax bill by settling rather than being fined.
Accountancy firm KPMG said the decision has potentially broad implications, and Deloitte highlighted the court’s rejection of the judge-made rule approach in favour of the statutory test. Because corporation tax applies across the UK, the ruling is relevant to companies throughout England, Wales, Scotland and Northern Ireland.
For households, the case is a reminder of how regulators can require energy suppliers to compensate customers when things go wrong. Readers wanting the wider picture on how bills are set can read our explainer on the energy price cap.
This article is general information, not legal or tax advice.
Sources: UK Supreme Court, ScottishPower (SCPL) Ltd and others v HMRC: press summary (21 October 2026); UK Supreme Court, case page UKSC/2025/0047 (21 October 2026); City AM, Supreme Court blocks Scottish Power’s £28m tax write-off (21 October 2026); KPMG, TMD other news in brief (22 October 2026); Deloitte, Business Tax Briefing (23 October 2026); University of Edinburgh School of Law, LLM European Law students attend UK Supreme Court in Glasgow (1 June 2026).
