Scottish Power is to face the tax authority at the UK’s highest court over a tax deduction on a £28m penalty to settle a probe with the regulator.
The legal case stems from a probe by the energy regulator Ofgem into Scottish Power between 2013 and 2016 regarding mis-selling, poor complaints handling, and a lack of cost transparency.
To resolve the investigations, Scottish Power, a subsidiary of Spanish utility firm Iberdrola, agreed to pay around £28m directly to consumers and consumer organisations.
The energy firm then attempted to claim tax deductions on the £28m, but HMRC denied the claim.
The tax authority said the energy firm was wrong to deduct the payments from its profits for corporation tax purposes and amended the taxpayers’ corporation tax returns accordingly.
Business expenses incurred during regular trading can be deducted to lower taxable profits. However, there is an established rule stating that fines or penalties incurred due to breaking the law/regulations cannot be deducted.
Scottish Power argues that the rule is much narrower and doesn’t apply to specific consumer-focused payments, meaning the energy firm should be allowed to deduct it.
In and out of court
HMRC’s ruling was appealed to the First-Tier Tribunal in 2021, which agreed with HMRC that the vast majority of the payments were not deductible. However, the FTT ruled that one of the payments (£554,000) was deductible.
Scottish Power appealed that decision, while HMRC appealed it to allow the £554,000 payment to be deductible.
In 2023, the Upper Tribunal dismissed Scottish Power’s appeal and granted HMRC’s appeal in relation to the £554,000 payment, rendering it nondeductible.
The case then went to the Court of Appeal, which ruled in Scottish Power’s favour in January 2025.
HMRC filed an appeal to the UK’s highest court, which was granted last June.
The case now proceeds to the Supreme Court, which will hear the case between Monday and Tuesday before Lord Reed, Lord Stephens, Lady Rose, Lady Simler, and Lord Doherty.
