Scottish Power is bracing for a million-pound tax bill after losing a protracted legal battle with HMRC.

The Supreme Court has ruled that the energy giant cannot deduct £28m in regulatory settlement payments from its taxable corporate profits.

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, the firm agreed to pay around £28m directly to consumers and consumer organisations.

Scottish Power, a subsidiary of Spanish utility firm Iberdrola, attempted to claim tax deductions on the £28m, but HMRC denied the claim.

The energy giant and the tax authorities have battled over the denied claim in court since 2021, when HMRC’s ruling was appealed to the First-Tier Tribunal (FTT). The FTT agreed with HMRC that the vast majority of the payments were not deductible, but ruled that one payment of £554,000 was deductible.

The case went to the Upper Tribunal, which dismissed Scottish Power’s appeal and, regarding the £554,000 payment, granted HMRC’s appeal, rendering it nondeductible.

The energy giant appealed to the second-highest court in the country, the Court of Appeal, which in January 2025 sided with Scottish Power over the payments.

Regulatory settlements treated as fines

HMRC took the case to the Supreme Court, which heard it in May before Lord Reed, Lord Stephens, Lady Rose, Lady Simler, and Lord Doherty. On Wednesday, the top court allowed the tax agency’s appeal and restored the Upper Tribunal’s decision.

The court said it is wrong to characterise the redress payments as voluntary, as they were paid to avoid significant penalties the regulator would otherwise have imposed.

The top court noted that allowing tax deductions for settlement packages would create an unfair advantage, incentivising companies to negotiate settlements and bypass formal penalties just to secure a tax write-off.

Commenting on the ruling, an HMRC spokesperson said: “We welcome the Supreme Court’s decision, which confirms our longstanding position that penalties and payments of this nature cannot be deducted when calculating taxable profits.”

A spokesperson for Scottish Power said, “We note the decision”.