Scottishpower (SPCL) Ltd and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 04 February 2022 |
| Neutral Citation | [2022] UKFTT 41 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2022] UKFTT 41 (TC)
Judge Charles Hellier
David Goldberg QC and Laura Inglis instructed by Linklaters LLP, appeared for the appellant.
John Tallon QC instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents.
Corporation tax – Whether redress payments made pursuant to settlement with regulator were non-deductible penalties (McKnight) – Whether wholly and exclusively incurred for the purposes of the trade CTA 2010, s. 54 – Whether any deductible as Charitable Donations under CTA 2010, s. 189.
The First-tier Tribunal (FTT) found that redress payments made under a settlement with the regulator were unallowable penalties unless calculated to compensate customers for actual losses, and that the payments were not qualifying charitable donations.
ScottishPower (SPCL) Ltd, ScottishPower Renewables (UK) Ltd, ScottishPower (DCL) Ltd, and ScottishPower Energy Retails Ltd (the Appellants) made payments to the Gas and Electricity Markets Authority (the Regualtor) in connection with four investigations conducted by Ofgem into the appellants businesses.
The appellants entered into settlement agreements which included a nominal penalty and redress payments made to customers and charities. The appellants claimed a deduction from trade profits for the redress payments made.
HMRC denied deduction of the redress payments on the basis that they had the nature of penalties. The appellants contended that the object of the payments was to compensate rather than punish, and that they were incurred wholly and exclusively for the purposes of the trade as they were the result of regular and unavoidable incidents arising from carrying on the business of supplying energy on the scale of the Appellants businesses.
The FTT determined that the regulator intended the payments made under the settlements to be punitive and concluded that redress payments were not deductible unless they were compensatory. The FTT identified £554,013 of payments that, having been calculated to make good actual losses suffered by mis-sold customers, could properly be described as compensation. The balance was disallowed.
Finally, the FTT found that the payments to charities were not qualifying charitable donations on the basis that the appellants agreed to make these payments to settle the investigations. The FTT's view was the ending of the investigations was a benefit received by the appellants and the value of this clearly exceeded the statutory limits within CTA 2010, s. 197.
Having established the facts, and in line with previous decisions the FTT applied the relevant policies disallowing the deduction of penalties. The FTT drew a distinction between redress payments that are intended to be punitive, and payments made to compensate a customer for any actual loss suffered.
[1] This decision concerns the deductibility, in computing the Appellants' trading profits, of payments made in connection with four investigations conducted by Ofgem into the energy supply businesses of the Appellants. The payments, for which the Appellants used the appellation Redress Payments, were made under settlement agreements made with Ofgem.
[2] We use SCPL, SRL, SPDCL and SPERL, to refer to the first, second, third and fourth Appellants.
[3] Section 1 of the Utilities Act 2000 created the Gas and Electricity Markets Authority (“GEMA”). The Office of Gas and Electricity Markets (“Ofgem”) carries out GEMA's day to day work and investigates matters on its behalf.
[4] Section 4 of the Electricity Act 1989 makes it an offence to supply or generate electricity without a licence. The Act vests in GEMA the power to grant such a licence. Such a licence may incorporate conditions imposed by GEMA and must, by section 8A of that Act, contain the Standard Licence Conditions (the “SLC”s).
[5] Section 3A of the Electricity Act prescribes GEMA's objective in carrying out its functions under the Act. It is:
to protect the interests of existing and future customers in relation to the [conveyance of] electricity.
and section 3A(1A) provides that the interests of those existing and future customers are:
their interests taken as a whole
[6] The Act confers a number of enforcement powers on GEMA:
- by section 25 it may order compliance with a licence condition or statutorily specified condition (a relevant requirement);
- section 27A provides that where GEMA is satisfied that an electricity supplier has contravened any licence condition or relevant requirement it mayimpose…a penalty of such amount as is reasonable in the circumstances; and
- section 27G, which had effect from 18 February 2014 (which was after one of the payments to which this decision relates), provides that where GEMA is satisfied that there has been any such contravention and as a result consumers have suffered loss or inconvenience, it may make a Consumer Redress Order requiring action to remedy the consequences of the contravention.
[7] Section 27A requires GEMA to publish notice of a proposed penalty, to consider representations made in relation to the proposal before imposing the penalty, and once the penalty has been imposed, to give notice that it has done so. There are similar provisions in relation to Consumer Redress Orders.
[8] Section 27B requires GEMA to publish a policy statement in relation to the determination and imposition of penalties and their amounts. Section 27E provides for an appeal to the High Court against a penalty or its amount.
[9] Penalties are paid to the Treasury via the Consolidated Fund.
[10] There are similar provisions in Gas Act 1986 in relation to the supply of gas.
[11] In its policy statement on penalties and Consumer Redress Orders of 6 November 2014, GEMA said that its vision for its enforcement work was to achieve a culture where businesses acted in line with their obligations. The strategic objectives for enforcement were to:
deliver a credible deterrence…
ensure visible and meaningful consequences for businesses who fail consumers or do not comply
achieve the greatest possible impact
[12] Its central objectives were to obtain a fair outcome for consumers and deter future non-compliance. At para 2.4 it said:
… the Authority [GEMA] considers that non-compliance should normally cost significantly more than compliance and that financial penalties should act as a significant deterrent … The Authority will, therefore, seek to ensure that any financial penalty, and compensation or other payment under a consumer redress order … significantly exceeds
- the gain to the regulated person, … and
- the detriment caused to customers affected by the contravention or failure.
[13] In the section dealing with the process for determining the amount of a penalty or the amount payable under a consumer redress order, it said:
5.3 The total amount payable will usually be made up of two elements
- the removal of the detriment suffered by consumers and any gain made by the regulated person as a result of the contravention … and
- an amount which reflects the seriousness of the contravention or failure and the need for deterrence (the penal element)
[14] The notice then set out five steps in the calculation of the elements described in 5.3 and (aiming to ensure “appropriate redress”) the factors to be considered at each stage. Steps 1 to 3 involve the calculation of the detriment or gain, and the assessment of the seriousness and mitigating or aggravating features. Step 4 is to consider an adjustment for deterrence.
[15] Step 5 is to apply a “discount in settled cases”. This looks to the process of settling a penalty under Ofgem's enforcement guidelines (see below). The section describes the advantages of early settlement: speed, saving resources, messaging, recognising (at 5.24) that settlement is likely to be in the interest of consumers, and
… in recognition of the benefits of such agreements the Authority will reduce the penal element of the overall financial liability to be imposed.
[16] The size of the discount is said to reflect the stage in the process of imposing a penalty at which agreement is reached with the licensee:
- 30% in the early settlement window,
- 20% in the middle settlement window,
- 10% in the late settlement window.
[17] Section 6 of the notice is a discussion of the interaction of “penalties and compensation and/or other redress payments”. It says that the Authority starts from the principle that redress should be provided to customers who have suffered detriment. It notes that this may take the form of a Voluntary Redress Payment, although the Authority could make a Consumer Redress Order where it has identified and calculated consumer detriment. Where the identification of specific customers affect by the breach is difficult or where it is not possible or practical to compensate directly affected customers the Authority might require a payment to “other customers or a consumer fund”.
[18] After discussing the identification of any gain made by the supplier by a contravention, it indicates that, if the amount paid to consumers is adequate redress, “the Authority will normally remove any additional gain by imposing a financial penalty”, and then, at 6.10 :
Normally the Authority will also impose an element to be paid as a financial penalty.
[19] Ofgem also published Enforcement Guidelines on 12 September 2014 describing how it would use its enforcement powers, how it would provide redress to customers and how breaches would be “punished or deterred”. The document explains that an investigation may begin if it considers that there may have been a breach of obligations, and describes the process of investigation. In section 5 it deals with settling a case:
To settle a case a company … must be prepared to admit the breaches that have occurred [and] agree not to challenge any finding of breach, penalty or redress order …
It is important to...
To continue reading
Request your trial