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ScottishPower v HMRC

This is an extremely important Court of Appeal decision about the tax treatment of fines and other penalties. The taxpayer was investigated by Ofgem in relation to mis-selling, complaints handling and cost transparency. The end result was that an agreement was made under which the company was fined a nominal £1 but undertook to pay redress payments totalling £28m to affected customers and to certain consumer organisations.

The company sought tax relief for the payments as a business expense. HMRC denied relief on the basis that the payments had the character of a penalty. It argued that it has been long established in case law that there is a public policy imperative in denying deductions for penalties. The FTT allowed relief for some of the payments, but the UT denied relief in full, essentially on the grounds that the redress payments had the character of a penalty.

The Court of Appeal has reversed this and allowed relief for everything except the nominal £1 fine. It reviewed the case law and confirmed