Supreme Court: payments to settle regulatory investigations are not tax deductible

On 21 October 2026, the Supreme Court unanimously ruled in HMRC’s favour in ScottishPower (SCPL) Ltd and others v HMRC [2026] UKSC 35, reversing the Court of Appeal. Around £28 million that ScottishPower paid to customers and charities under settlements with Ofgem is not deductible for corporation tax.

Two points matter most.

First, penalties are not deductible because they are not incurred “wholly and exclusively for the purposes of the trade”. A business that pays a penalty is answering for a breach, not carrying on its trade.

Second, the same applies to payments akin to penalties. Payments agreed with a regulator to avoid a fine are treated as the fine, even if the money goes to customers or charities and even where part of it compensates those affected.

Taxpayers who relied on the Court of Appeal’s more generous approach since January 2025 can no longer do so.

What should I do?

Businesses that have settled, or are settling, regulatory or legal claims should:

• Review any deductions claimed for regulatory redress or settlement payments, particularly those relying on the Court of Appeal’s decision, and consider whether returns or provisions need revisiting.
• Check whether civil settlements are distinguishable. Settlements with private claimants, with no admission of wrongdoing and no penalty avoided, can still be deductible, but the facts must be well evidenced.
• Take care with mixed settlements and those involving public bodies: one penal element can taint the whole package.
• Build the tax cost into negotiations with regulators, and brief CFOs and boards.

What else do I need to know?

The findings of the Supreme Court are not limited to the energy sector. It is likely to apply to settlements with any regulator that can impose penalties, such as the FCA, the CMA and the ICO.

Arguing that a regulatory breach was an unavoidable consequence of trading is unlikely to succeed.

We expect HMRC to rely on the ruling in open enquiries involving settlement payments, including civil litigation settlements. Businesses should be ready to explain clearly why their payments are not akin to penalties.

Further information

For further information on the tax treatment of settlement and redress payments, please contact any of the members of Eversheds Sutherland’s team set out below.