(1) SCOTTISHPOWER (SCPL) LIMITED (2) SCOTTISHPOWER RENEWABLES (UK) LIMITED (3) SCOTTISHPOWER (DCL) LIMITED (4) SCOTTISHPOWER ENERGY RETAIL LIMITED v THE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMS
| Jurisdiction | UK Non-devolved |
| Judge | Mr Justice Miles,Upper Tribunal Judge Swami Raghavan |
| Subject Matter | 5 September 2023 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
| Published date | 05 September 2023 |
Neutral Citation: [2023] UKUT 00218 (TCC) Case Number: UT/2022/000045
UT/2022/000051
UPPER TRIBUNAL
(Tax and Chancery Chamber) Rolls Building, London
CORPORATION TAX – whether FTT erred in finding payments pursuant to settlement
agreements with regulators were non-deductible – no – taxpayers’ appeals dismissed. Whether
FTT erred in treating an element of payment which it consider deductible when that payment
was part of a package of payments having a penal character – yes – HMRC’s appeal allowed
Heard on: 16 and 17 May 2023
Judgment date: 05 September 2023
Before
MR JUSTICE MILES
JUDGE SWAMI RAGHAVAN
Between
(1) SCOTTISHPOWER (SCPL) LIMITED
(2) SCOTTISHPOWER RENEWABLES (UK) LIMITED
(3) SCOTTISHPOWER (DCL) LIMITED
(4) SCOTTISHPOWER ENERGY RETAIL LIMITED
Appellants
and
THE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMS
Respondents
Representation:
For the Appellants: David Goldberg KC, Laura Inglis, Counsel, instructed by Linklaters
LLP
For the Respondents: David Ewart KC, Thomas Chacko, Counsel, instructed by the General
Counsel and Solicitor to His Majesty’s Revenue and Customs
1
DECISION
INTRODUCTION
1. This is an appeal by the taxpayers, and a cross-appeal by HMRC in relation to a decision
of the First-tier Tribunal (Tax Chamber) (“FTT”) reported as Scottish Power (SPCL) Ltd and
others v HMRC [2022] UKFTT 41 (TC) (“the FTT Decision”).
2. The taxpayers are energy providers regulated by the energy regulator, Ofgem. The
taxpayers entered into various agreements with Ofgem in settlement of a number of
regulatory investigations into matters such as mis-selling, complaints handling and costs
transparency. Under the various settlement agreements, made between October 2013 to April
2016, the taxpayers paid sums called “penalties” in nominal amounts (£1), together with
payments to consumers, consumer groups and charities totalling approximately £28m.
3. HMRC concluded that the taxpayers were wrong to deduct the £28m payments from their
profits for the purposes of corporation tax and amended the taxpayers’ corporation tax returns
accordingly. On appeal by the taxpayers, the FTT agreed with HMRC that the vast majority
of the payments were not deductible. The taxpayers appeal against that decision, with the
permission of the FTT. HMRC appeal against the FTT’s conclusion that one of the payments
was deductible. That was a payment of £554,013 to consumers directly affected by the mis-
selling. The FTT considered it was made as compensation, paid wholly and exclusively for
the purposes of the taxpayer’s trade.
4. A central issue in the appeal is the scope of the principles to be derived from the House
of Lords reasoning in McKnight (HM Inspector of Taxes) v Sheppard [1999] 1 WLR 1333,
[1999] STC 669 (“McKnight”). In that case, the taxpayer sought to deduct fines imposed by
the Stock Exchange on the taxpayer stockbroker for breaches of the Stock Exchange
Council’s rules and his legal costs of challenging those fines.
5. HMRC argue (putting it broadly) that McKnight establishes that payments which are in
the nature of penalties, or in lieu of such penalties, are non-deductible.
6. The taxpayers dispute both the scope of the principles to be derived from McKnight and
(in any event) their applicability to the settlement payments to consumers and others in issue
here. They also argue that the discussion of deductibility in McKnight was obiter (the question
before the House of Lords only concerned the disputed deduction for legal costs) and that any
principle supposedly illustrated by it is inconsistent with the subsequent enactment of s46
Corporation Tax Act 2009 (“CTA 2009”). Under that provision, profits (and therefore the
deductibility of expenses) for corporation tax purposes must follow generally accepted
accounting practice and can only be adjusted from that treatment where “required or
authorised by law”. Here, as the FTT found, the payments were deductible according to
generally accepted accounting practice, and (so the taxpayers argue) no legal adjustment
applies so as to allow departure from that treatment.
7. Before addressing the relevant statutory law and case-law, it is helpful to outline the
regulatory framework which provided the context for the settlements under which the
payments were made, and the factual background relevant to the payments.
REGULATORY AND FACTUAL BACKGROUND
8. The taxpayers, as suppliers and generators of electricity and gas, were regulated by the
Gas and Electricity Markets Authority (“GEMA”). The detail of the relevant regulatory
framework, which derives from the statute, policy statements and guidelines was
To continue reading
Request your trial