Key Facts
- •ScottishPower (and related companies) made £28m in payments to consumers, consumer groups, and charities to settle regulatory investigations by Ofgem.
- •These settlements included nominal penalties (£1) and substantial payments.
- •HMRC argued the £28m was non-deductible for corporation tax purposes.
- •The FTT agreed with HMRC on most payments but deemed one £554,013 payment deductible.
- •The case centered on the interpretation of *McKnight v Sheppard* concerning the deductibility of penalties.
Legal Principles
Payments in the nature of penalties, or in lieu of penalties, are generally non-deductible for tax purposes.
McKnight v Sheppard [1999] 1 WLR 1333
Profits of a trade must be calculated in accordance with generally accepted accounting practice, subject to adjustments required or authorised by law.
s46 Corporation Tax Act 2009
A payment's deductibility depends on its nature and the policy behind the rule making it payable, not simply whether it was incurred in the course of trade.
McKnight v Sheppard; Von Glehn; Herald Weekly Times
Outcomes
Taxpayers' appeals dismissed.
The Upper Tribunal (UT) found the FTT correctly applied *McKnight v Sheppard*, concluding that most payments were in lieu of penalties and thus non-deductible. The UT corrected the FTT's error in deeming the £554,013 payment deductible, holding that it was part of a larger penal package.
HMRC's appeal allowed.
The UT held the FTT erred in isolating the £554,013 payment as compensatory. The UT determined the correct approach was to assess the entire package of payments, finding them to be in lieu of penalties, and therefore non-deductible.