Are Fines and Penalties Tax Deductible? The Supreme Court's £28m ScottishPower Ruling

What the Supreme Court decided on 21 October 2026

The short answer is that the Supreme Court treated ScottishPower's redress payments exactly as it would have treated a fine: as money not spent for the purposes of the trade, and therefore not deductible. Lady Rose and Lord Doherty gave the judgment, with which Lord Reed, Lord Stephens and Lady Simler agreed. The appeal had been heard on 18 and 19 May 2026.

The court's press summary sets out the core findings in three steps:

• Why penalties are not deductible. The reason is that they are not incurred "wholly and exclusively for the purposes of the trade" under section 54(1)(a) of the Corporation Tax Act 2009, not because of a separate judge-made rule. A taxpayer paying a penalty is satisfying a legal obligation arising from its infringement, not carrying on its trade.
• The redress payments were not voluntary. They were paid to avoid the significant penalties that would otherwise have been imposed.
• Treating them differently would be unfair. A business that settles (and gives up its right to appeal) would get tax relief that a business which forces the regulator to impose an appealable penalty would not.

The court therefore allowed HMRC's appeal and restored the decision of the Upper Tribunal, which had disallowed every penny of the payments. According to City AM's report of the judgment, an HMRC spokesperson welcomed a decision that "confirms our longstanding position", while a ScottishPower spokesperson said only that the company noted the decision. ScottishPower is a subsidiary of the Spanish utility Iberdrola.

For regulated businesses the practical effect is simple: a settlement figure agreed with a UK regulator in place of a penalty should now be modelled as a post-tax cost, in the same way as a fine.

Are fines and penalties tax deductible? The short answer

Fines and penalties imposed for breaking the law or breaching regulations are not tax deductible for UK corporation tax, and the ScottishPower ruling confirms that the same applies to payments that are, in substance, made in place of a penalty. The rule flows from two provisions of the Corporation Tax Act 2009.

Section 46(1) says trading profits are calculated in accordance with generally accepted accounting practice, "subject to any adjustment required or authorised by law". Section 54(1)(a) then provides that no deduction is allowed for "expenses not incurred wholly and exclusively for the purposes of the trade". A fine can sit perfectly properly as an expense in a company's accounts and still be disallowed for tax.

HMRC's own guidance says the same. Its Business Income Manual at BIM42515 states that a fine incurred because of a trader's infraction of the law is not allowable, relying on the 1920 Court of Appeal decision in CIR v Alexander von Glehn & Co, because it is not incurred wholly and exclusively for the purpose of the trade. The same page says that where a regulatory body imposes a penalty for breach of regulations, or a fine follows a prosecution for breach of regulations, it is not an allowable expense.

The question the ScottishPower case had to answer was narrower and more commercially important: what happens when no real penalty is imposed at all, because the company agrees instead to pay money to customers, charities or a redress fund? Until this week the answer from the Court of Appeal was that such payments could be deducted. That is no longer the law. Large enforcement outcomes of the kind Corporate INTL has covered this year, such as the €403m location data fine on Google, show the sums now at stake when a business decides whether to settle or contest.

What were the ScottishPower redress payments?

The Redress Payments were sums ScottishPower Energy Retail Limited (SPERL) agreed to pay under four settlement agreements with the Gas and Electricity Markets Authority (GEMA), whose day-to-day work is carried out by Ofgem. Each settlement closed an investigation in which Ofgem found serious breaches of SPERL's supply licence conditions or of the Electricity and Gas (Community Energy Saving Programme) Order 2009, and each was paired with a nominal penalty of £1.

The judgment records the four settlements in detail:

Investigation	Settlement date	Payments agreed	Penalty imposed	What Ofgem had signalled
Mis-selling and doorstep marketing (licence condition 25)	10 October 2013	£7.5m to vulnerable customers and £1m for compensation to mis-sold customers (unspent sums to a fuel poverty charity)	£1	A "significant penalty"
Cost reflectivity of payment methods (condition 27.2A)	15 May 2014	£750,000 to a Citizens Advice awareness campaign	£1	A fine of £2.5m if contested, per an internal ScottishPower email
Community Energy Saving Programme targets	4 December 2014	£2.4m to a fuel poverty charitable trust	£1	A £3.6m penalty if contested
Complaints handling and billing	25 April 2016	£18m of consumer redress: up to £15m to qualifying customers, £3m plus any unused balance to charities	£1	An initial £23m, discounted to £18m for settlement by the deadline

Two features of the settlements mattered to the outcome. First, SPERL admitted the breaches in each case, and Ofgem's enforcement guidelines require a settling company to accept a finding of breach and agree not to appeal. Second, the decision notices published by GEMA tied the £1 penalties directly to the redress: the first notice said the breaches warranted a "significant penalty" and that the penalty would have been higher had SPERL not agreed to pay £8.5 million to consumers and settle.

The judgment also notes the business context. In the complaints case, the failures arose from SPERL's move from some 80 legacy computer systems to a single new system covering about 5 million customer accounts, and SPERL had already written off around £8 million of customer bills before negotiations began.

How the case moved through four courts

The case took more than four years to resolve, and the tax answer changed twice on the way. The First-tier Tribunal decided it in February 2022; the Supreme Court restored the Upper Tribunal's approach in October 2026.

Court	Date	Outcome	Key reasoning
First-tier Tribunal [2022] UKFTT 41 (TC)	4 February 2022	Mostly for HMRC	The payments were intended as punishment, so not deductible, except £554,013 paid to mis-sold customers, which was compensatory and deductible
Upper Tribunal [2023] UKUT 218 (TCC)	5 September 2023	Fully for HMRC	Payments formed an "overall package" under threat of penalty; splitting punitive and compensatory elements was wrong
Court of Appeal [2025] EWCA Civ 3	17 January 2025	Fully for ScottishPower	The ban on deducting penalties is a judge-made adjustment under section 46; extending it to non-penalties is for Parliament
Supreme Court [2026] UKSC 35	21 October 2026	Fully for HMRC	Penalties fail the section 54(1)(a) purpose test; the redress payments are akin to penalties

The Court of Appeal's reasoning, given by Falk LJ, had real appeal for taxpayers. It treated the non-deductibility of penalties as a narrow policy rule tied to the legislation creating each penalty, so that anything which was not technically a penalty fell back under ordinary accounting principles and was deductible. It also expressed concern about the lack of clarity that extending the principle would create. The Supreme Court rejected that framing at its root, so the narrow exception is gone.

Why penalties are not deductible: the wholly and exclusively test

Penalties are not deductible because their nature means they are not spent for the purposes of the trade, and the Supreme Court said that has always been the correct reading of the case law. The justices traced the rule back to two cases from 1919 and 1920, Warnes and von Glehn, in which penalties for export breaches, paid under consent orders after the proceedings were settled, were held non-deductible.

The central passage of the judgment, at paragraph 81, explains that penalties "are punishments imposed because of wrongs which the taxpayer has committed", and that the taxpayer's object in paying one "is not to carry on the trade, but to answer for his breach". It is not enough that a payment is made in the course of the trade or arises out of it; it must be made for the purpose of earning the profits.

The court then dealt with the House of Lords' 1999 decision in McKnight v Sheppard, where Lord Hoffmann had said a court "may easily conclude that the legislative policy would be diluted" if a taxpayer could share the burden of a fine with the rest of the community through a tax deduction. The Court of Appeal had read that as creating a separate policy rule. The Supreme Court called this "a misreading" and held that Lord Hoffmann was simply construing the purpose test. Policy supports the result, but it is not the source of it.

The justices also rejected a suggestion from the Court of Appeal that regulators could simply "gross up" redress payments to offset any tax relief. A regulator, the court said, could not easily predict how a company would account for a payment or how HMRC would respond to it.

One consequence for advisers is that arguments based on accounting treatment carry no weight here. The court said expressly that it did not matter that, under generally accepted accounting practice, the redress payments would be included as expenses in ScottishPower's accounts, because section 46(1) makes the accounts subject to adjustments required by law.

Why "voluntary" redress payments were treated as penalties

The redress payments were treated as penalties because, as a matter of substance, they were the price of avoiding one. ScottishPower argued that nobody compelled SPERL to settle, and that money paid to customers and charities chosen with the regulator was quite different from a fine paid into the Consolidated Fund. The Supreme Court did not accept that characterisation.

It relied on a finding by the First-tier Tribunal that, had SPERL not settled, it was likely that "even after any appeal, a penalty of the same order of magnitude as the settlement amount would have been borne". The settlements were made "in place of" what might have been imposed. That finding, the court said, was "clear and inevitable".

The court gave three further reasons:

• Fairness between settlers and litigants. A business caught "bang to rights" is more likely to settle quickly. A business with a borderline case may prefer to make the regulator impose a penalty it can appeal. It would be unfair for the first to get tax relief while the second did not.
• Licence conditions are not contracts. ScottishPower compared the payments to compensation for breach of contract, the contract being its supply licence. The court said licence conditions are more like statutory obligations, and the payments were not a private law remedy restoring customers to their previous position.
• The recipient does not change the nature of the payment. That the money went to recipients selected under the regulator's process rather than to the Consolidated Fund made no difference.

The court also refused to let SPERL's culpability reopen the question. ScottishPower relied on a 1932 Australian case, Herald and Weekly Times, about defamation damages treated as an almost unavoidable incident of running a newspaper. The Supreme Court said that, whatever its continuing relevance to defamation damages, it "has no place" in deciding whether penalties or redress payments are deductible, because the regulator had already weighed culpability when setting the figure.

The £554,013 compensation payment and the overall package

The Supreme Court held that even the part of the settlement paid directly to mis-sold customers was not deductible, because it was part of a single package agreed under threat of penalty. This is the point most likely to matter in future negotiations.

The First-tier Tribunal had allowed £554,013 paid by cheque or credit to customers affected by mis-selling, describing it as "akin to damages for breach of a tortious obligation not to mislead them". The Upper Tribunal disagreed. In its 2023 decision it said the focus should remain on whether, on a global assessment of the evidence, the payment had a punitive character, taking into account why it was made, to whom, and how far it actually compensated the victims.

The Supreme Court agreed with the Upper Tribunal. It said the £554,013 "was as much a punishment for breaches of the conditions as the other sums", and quoted the Upper Tribunal's description of a package "put together under the threat of penalty" and "paid in lieu of a penalty".

The lesson is that labelling one element of a settlement "compensation" will not by itself secure a deduction if the whole deal was negotiated as an alternative to a fine. Whether a differently structured arrangement, agreed outside a penalty negotiation, might be treated differently was not decided.

What can still be deducted: legal costs, compensation and regulator fees

Several categories of spending connected with regulatory trouble can still be deductible, but the ScottishPower judgment narrows the space and leaves some questions open. The table below draws on the judgment and on HMRC's BIM42515 guidance.

Type of payment	Likely corporation tax treatment	Basis
Fine or penalty imposed by a regulator or court	Not deductible	Section 54(1)(a); von Glehn; ScottishPower
Redress or charity payments agreed to avoid a penalty	Not deductible	ScottishPower [2026] UKSC 35
Compensation to customers forming part of a penalty settlement package	Not deductible	ScottishPower, the £554,013 payment
Regulatory levies broadly covering the regulator's costs	Normally allowable, even after a breach	HMRC BIM42515
Civil settlement where allegations were neither admitted nor proved	May be allowed	HMRC BIM42515, citing Golder v Great Boulder
Civil settlement where liability was admitted or proved	Allowed if restitutionary, not if punitive	HMRC BIM42515
Legal fees for defending disciplinary or regulatory proceedings	Held deductible in McKnight v Sheppard; not decided in ScottishPower	Judgment, paragraph 80

The Supreme Court was careful to say that its discussion of McKnight extended only to why penalties are not deductible, and that whether legal fees for resisting disciplinary proceedings are deductible was not raised. In McKnight itself, the House of Lords held a stockbroker's legal costs deductible while his fines were not.

The judgment also acknowledges a grey area. Spending to bring a business back into compliance, or to "pre-empt or appease the regulator" earlier in an investigation, may sit on a difficult dividing line. The court said HMRC will make its own assessment and, if necessary, the tribunal will decide. Commercial settlements of private claims, such as Vodafone's £85m franchisee settlement, reached with no admission of liability, sit in a different category under HMRC's guidance.

How Ofgem settlements and redress work

Ofgem's enforcement model has for years encouraged companies to settle by paying redress rather than large fines, which is why the tax treatment matters so much in the energy sector. GEMA's power to fine comes from section 27A of the Electricity Act 1989, which lets it impose a penalty "of such amount as is reasonable in all the circumstances", with a parallel power in the Gas Act 1986. The judgment notes that the combined maximum for penalties and compensation is 10 per cent of turnover.

Under GEMA's 2014 Penalties Policy, as summarised in the judgment, settlement discounts range from 30 per cent in the early settlement window to 10 per cent in the late window, and apply only to the penal element, not to any gain or consumer detriment identified. A settling company must admit the breaches and agree not to appeal. Ofgem's 2015 guidance on voluntary redress adds that a company should not gain any benefit, financial or otherwise, from such payments.

The First-tier Tribunal found that Ofgem's approach shifted from about 2010. In 2010 some £15 million of penalties were imposed with no redress payments; by 2019 penalties were about £2 million but redress payments were about £50 million. Much of that redress money now flows through Ofgem's Energy Redress Scheme, delivered by the Energy Saving Trust, which says it has awarded over £246 million since 2018 to charities and community organisations supporting energy consumers in vulnerable situations.

The ScottishPower judgment does not change Ofgem's powers or settlement process. What it changes is the after-tax cost of settling: a company that agrees £10 million of redress in place of a fine can no longer assume that part of that cost will be offset by corporation tax relief. Energy businesses can find specialist energy, environment and resources advisers in the Corporate INTL directory.

What the ruling means beyond the energy sector

The judgment is about Ofgem settlements, but its reasoning is framed in general terms about penalties and payments made in place of them, so the likely effect is that it will be applied to settlements with other UK regulators that combine a reduced or nominal penalty with redress. The court's reasoning turned on substance rather than form: the decision notices linked the payments to the penalty that would otherwise have been imposed.

Corporate INTL has reported a run of enforcement outcomes this year where this question is live. The CMA's consumer powers were on display in the £4.8m Wayfair fine over false time-limited deals, and Ofcom's approach is set out in our explainer on how Ofcom enforces the Online Safety Act. Whenever a business in those regimes is offered a lower penalty in exchange for redress, the ScottishPower reasoning suggests the redress element should be budgeted as non-deductible.

Multinational groups face the same question in other systems. Our report on the $1.21bn Bank of America AML and sanctions penalties noted that the bank said the charge is not tax-deductible, and our guide to how EU cartel fines are calculated explains the scale of exposure in competition cases. Each jurisdiction applies its own tax rules, so the UK answer cannot simply be assumed elsewhere.

What in-house counsel and tax teams should do now

The immediate task is to treat any payment negotiated as an alternative to a penalty as a post-tax cost, and to review open positions taken on the strength of the Court of Appeal decision. Practical steps include:

• Re-price live negotiations. Model settlement offers on a post-tax basis. A redress package that looked cheaper than a contested fine because of assumed tax relief may no longer be.
• Review filed returns and provisions. Identify any deductions claimed for redress, voluntary payments or charitable contributions agreed with a regulator since January 2025, and consider with advisers whether returns or tax provisions need revisiting.
• Do not rely on labels. Calling part of a settlement "compensation" did not work for the £554,013 in this case. If genuine compensation for customer loss is intended, take advice on how it is documented and agreed.
• Separate remediation from settlement. Costs of fixing systems and processes are different in nature from payments in lieu of a penalty, but the court flagged a difficult dividing line for spending made to "pre-empt or appease" a regulator. Keep clear records of why each cost was incurred.
• Weigh settlement against contest. Settlement still brings discounts and saves management time, but it requires admissions and a waiver of appeal rights, and it no longer carries any tax advantage over a penalty.
• Align group structures. Where settlement costs are recharged within a group, as some of ScottishPower's were under an intercompany agreement, check how recharges are treated. Our guides on branch versus subsidiary structures and the domestic minimum top-up tax cover wider group tax considerations.

When to take local legal and tax advice

Businesses should take local legal and tax advice as soon as a regulator opens an investigation that could end in a penalty or a redress package, not after a settlement figure is agreed. The tax cost of settling is now part of the commercial decision, and it is easier to shape the structure and documentation of a deal before terms are fixed.

Advice is particularly worthwhile in four situations: when a UK regulator signals a penalty and invites settlement; when a group has claimed deductions for redress or voluntary payments in returns that are still open; when a settlement involves payments in several jurisdictions with different tax rules; and when HMRC opens an enquiry into the treatment of a regulatory payment.

The Corporate INTL directory lists tax lawyers and advisers in the United Kingdom, specialist UK regulatory and public law advisers who handle investigations and settlement negotiations, and UK dispute resolution lawyers for tribunal challenges. Groups can also search the full directory of UK legal and business advisers, and cross-border groups can use the wider network of tax advisers worldwide, which spans more than 150 jurisdictions. If you would like an introduction, use the Find an Expert form below this article to submit a request and be put in touch with a member.

Frequently asked questions

Are fines and penalties tax deductible in the UK?

No. Fines and penalties for breaking the law or breaching regulations are not deductible for UK corporation tax because they are not incurred wholly and exclusively for the purposes of the trade under section 54(1)(a) of the Corporation Tax Act 2009. The Supreme Court confirmed this on 21 October 2026 in ScottishPower v HMRC.

Are redress payments tax deductible?

Not when they are paid in place of a regulatory penalty. The Supreme Court held that about £28 million of redress payments ScottishPower made to customers and charities under Ofgem settlements were akin to penalties and not deductible, because they were paid to avoid the significant fines that would otherwise have been imposed.

What did the Supreme Court decide in ScottishPower v HMRC?

In [2026] UKSC 35 the court unanimously allowed HMRC's appeal and restored the Upper Tribunal's decision. It held that penalties are not deductible because they fail the wholly and exclusively test, and that the redress payments, including £554,013 paid to mis-sold customers, were sufficiently akin to penalties to be disallowed.

Are HMRC penalties allowable for corporation tax?

Penalties are generally not allowable. HMRC's Business Income Manual says a fine incurred because of a trader's infraction of the law is not allowable, and that penalties imposed by a regulator for breach of regulations are not an allowable expense. Interest and penalties on UK taxes are covered separately in HMRC's guidance at BIM42520.

Why did the Court of Appeal allow the deduction?

In January 2025 the Court of Appeal treated the ban on deducting penalties as a judge-made adjustment linked to the policy of each penalty regime, which should not be extended to payments that are not strictly penalties. The Supreme Court called that a misreading of earlier case law and reversed it.

Are legal fees for a regulatory investigation tax deductible?

Possibly. In McKnight v Sheppard the House of Lords held a stockbroker's legal costs of disciplinary proceedings deductible even though his fines were not. The Supreme Court in ScottishPower expressly said it was not deciding whether legal fees for resisting disciplinary proceedings are deductible, so specific advice is needed.

Is compensation paid to customers deductible?

It depends on the context. HMRC accepts that restitutionary payments in civil settlements may be deductible. But where compensation forms part of a package negotiated with a regulator in place of a penalty, the ScottishPower ruling indicates it will be treated as punitive and disallowed, as the £554,013 payment was.

What is the Energy Redress Scheme?

The Energy Redress Scheme is Ofgem's fund for voluntary payments from energy companies that may have breached rules. Delivered by the Energy Saving Trust, it says it has awarded over £246 million since 2018 to charities and community organisations supporting energy consumers in vulnerable situations.

Does the ruling apply to regulators other than Ofgem?

The case concerned Ofgem settlements, but the court's reasoning is expressed in general terms: penalties are not spent for the purposes of the trade, and payments made in substance to avoid a penalty are treated the same way. Businesses settling with other UK regulators should expect HMRC to apply the same approach.

Sources

1. UK Supreme Court: ScottishPower (SCPL) Ltd and others v HMRC [2026] UKSC 35, judgment (21 October 2026)
2. UK Supreme Court: Press summary, ScottishPower v HMRC (21 October 2026)
3. Court of Appeal: ScottishPower (SCPL) Ltd and others v HMRC [2025] EWCA Civ 3 (17 January 2025)
4. Upper Tribunal: ScottishPower (SCPL) Ltd and others v HMRC [2023] UKUT 218 (TCC) (5 September 2023)
5. Corporation Tax Act 2009, section 54, legislation.gov.uk
6. Corporation Tax Act 2009, section 46, legislation.gov.uk
7. Electricity Act 1989, section 27A, legislation.gov.uk
8. HMRC Business Income Manual: BIM42515, specific deductions, fines
9. City AM: Supreme Court blocks Scottish Power's £28m tax write-off (21 October 2026)
10. Ofgem Energy Redress Scheme, delivered by the Energy Saving Trust

About this article

This analysis was researched and written by The Corporate INTL Newsroom, which covers cross-border legal, regulatory and business developments for lawyers, professional advisers and financiers in over 150 jurisdictions. It has been checked against the Supreme Court's judgment and press summary, the earlier Court of Appeal and Upper Tribunal decisions, the Corporation Tax Act 2009, the Electricity Act 1989, HMRC's published guidance and primary reporting. This article is general information, not legal or tax advice; for advice on a specific matter, consult a qualified adviser. Last reviewed 22 October 2026. For more analysis like this, visit the Corporate INTL newsroom or subscribe to Corporate INTL.