The UK Supreme Court heard oral arguments on 18 and 19 May 2026 in HMRC v ScottishPower (SCPL) Limited and Others (UKSC/2025/0047). Judgment has been reserved and could land at any point this year. For CFOs operating in regulated industries — energy, financial services, telecoms, water — this case is not background noise. It could directly determine whether your company’s next regulatory settlement is a fully deductible business expense or dead money that sits outside the tax base entirely.
Here is what you need to understand now, before the judgment lands.
The Facts in Brief
Between 2013 and 2016, ScottishPower entities settled a series of regulatory investigations with Ofgem covering mis-selling, complaints-handling failures, cost transparency, and related conduct issues. As part of those settlements, the companies agreed to pay nominal statutory penalties of £1 — a frankly symbolic sum — alongside substantial redress payments totalling approximately £28 million to affected customers, consumer organisations, and charities.
ScottishPower sought to deduct those £28 million redress payments for corporation tax purposes under section 54 of the Corporation Tax Act 2009, arguing the payments were incurred wholly and exclusively for the purposes of its trade. HMRC said no. The payments were, in HMRC’s view, effectively penalties dressed up as redress and therefore non-deductible under long-established principles.
The Journey Through the Courts
This case has now been litigated at four different levels, with each tribunal reaching a different conclusion on essentially the same facts.
The First-tier Tribunal found that most payments were non-deductible, carving out only a small proportion made directly to customers as genuinely compensatory. The Upper Tribunal then went further in HMRC’s favour, dismissing ScottishPower’s appeal and allowing HMRC’s cross-appeal — the result being that every single redress payment was ruled non-deductible.
Then, in January 2025, the Court of Appeal reversed that outcome entirely. In [2025] EWCA Civ 3, the Court unanimously held that the established rule against deducting statutory fines and penalties applies to actual statutory fines and penalties — and to nothing else. Payments made to consumers and charities as part of an Ofgem-negotiated settlement were not statutory penalties simply because they replaced the prospect of larger penalties. ScottishPower won. All the redress payments were deductible.
HMRC obtained permission to appeal to the Supreme Court, which heard the case before a five-judge panel: Lord Reed, Lord Stephens, Lady Rose, Lady Simler, and Lord Doherty. Judgment is now awaited.
The Core Legal Question
The issue is deceptively simple to state but legally contested: does the rule preventing deduction of fines and penalties extend to payments that are made in lieu of penalties, or that are punitive in character, even where they are not technically statutory penalties imposed by a regulator?
The Court of Appeal said no. The rule, drawing on cases such as CIR v Alexander von Glehn & Co Ltd [1920] 2 KB 553 and McKnight v Sheppard [1999] 1 WLR 1333, applies to fines and penalties that represent a punishment imposed under legislation — and no further. HMRC’s argument that the “character” of the payment matters, regardless of its legal form, was rejected as practically unworkable and analytically incorrect.
The Supreme Court will now decide whether that bright-line approach is right, or whether a broader public-policy principle prevents companies from obtaining tax relief for payments that function as regulatory punishment, whatever label is attached to them.
Why CFOs in Regulated Sectors Should Care
If you run finance for a business regulated by Ofgem, the FCA, the FRC, the ICO, the CMA, or any other UK regulator, the ScottishPower outcome matters to you directly. Regulatory investigations and negotiated settlements are a fact of commercial life. The questions your tax team should already be asking are:
- When we settle a regulatory investigation with a mix of nominal penalties and broader consumer or market redress, how do we characterise each component for corporation tax?
- Are our settlement structures designed to maximise the deductible element — or are we leaving tax relief on the table through imprecise drafting?
- If the Supreme Court sides with HMRC and broadens the non-deductibility rule, what is the exposure on historical settlements we have already deducted?
Pinsent Masons’ commentary on the Court of Appeal judgment noted that the Upper Tribunal’s approach had created serious practical difficulties when applied to different factual scenarios. A Supreme Court ruling for HMRC could reintroduce that uncertainty on a permanent basis and at the highest level of authority.
The Wholly and Exclusively Test Still Applies
Even if the Court of Appeal’s position is upheld, this is not a free pass. The deductibility of regulatory settlement payments still requires satisfaction of the wholly and exclusively test under section 54 CTA 2009. The FTT’s finding that ScottishPower’s payments met that test was not challenged on appeal — but that finding was fact-specific. A different set of facts, a different mix of motivations, or a settlement that blurred compensatory and punitive purposes could produce a different result.
Eversheds Sutherland’s analysis of the Court of Appeal decision highlights that the door is now open for deductions on many regulatory redress payments — but the key word is “many”, not “all”. Structure and documentation matter enormously.
The HMRC Position and Its Weaknesses
HMRC’s core argument — that payments should take on the character of penalties because the regulator agreed not to impose larger penalties — has a fundamental problem identified clearly by the Court of Appeal. The statutory test under section 54 CTA 2009 focuses on the intention and purpose of the paying company, not the regulator’s intentions. Applying a character analysis based on what Ofgem had in mind when negotiating a settlement would require courts to second-guess regulatory decision-making, with no clear stopping point.
As the Tax Adviser magazine observed in its commentary, the Court of Appeal produced a robust judgment. Freshfields, acting for ScottishPower, has described the case as potentially far-reaching for businesses in regulated sectors, and there is no certainty the Supreme Court will take a different view from the Court of Appeal.
What to Do While Judgment Is Pending
Do not wait for the Supreme Court decision before reviewing your position. There are practical steps you can take now regardless of how the case resolves:
Review historical settlements. If you have deducted regulatory redress payments in recent years, assess whether those deductions are defensible against both possible outcomes of the Supreme Court case. A HMRC compliance check on this point is not inconceivable once judgment is handed down.
Audit current and pending negotiations. If your business is in settlement discussions with a regulator right now, the way the settlement is structured and documented could determine whether the payments are deductible. Nominal penalties plus separately documented consumer redress or remediation payments is a different position from an undifferentiated lump sum.
Consider your financial statements. If you have included a deferred tax asset relating to anticipated deductions on regulatory settlements, the Supreme Court outcome could require a restatement. Discuss with your auditors now whether a contingent liability disclosure is warranted.
Watch for HMRC guidance post-judgment. HMRC has contested this at every level and will almost certainly issue guidance explaining how it intends to apply the Supreme Court decision in practice. The speed and content of that guidance will tell you a great deal about how aggressive HMRC plans to be on open years.
The Broader Principle
The ScottishPower case is really about where the public policy exception to deductibility ends. English law has long recognised that you cannot obtain tax relief for a criminal fine or statutory penalty — the state cannot bear part of the cost of punishing you for breaking the law. But modern regulatory enforcement looks nothing like that paradigm. Large regulated businesses routinely negotiate settlements that involve consumer redress, remediation programmes, process improvements, and charitable contributions, alongside nominal penalties. Whether those payments are “really” punishments or “really” trade expenses is often a matter of perspective as much as legal analysis.
The Supreme Court’s job is to draw a coherent line. CFOs need to know where that line falls, because it affects how regulatory risk is quantified, how settlements are structured, and how tax provisions are calculated from the moment a regulatory investigation opens.
If you operate in a regulated sector and want to understand what the ScottishPower outcome means for your tax position, contact Mark Hendy at Tanous. Tanous provides CFO-level tax advisory to businesses navigating complex compliance and regulatory environments.