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Payments under settlement agreements with industry regulators were deductible

By Mark McLaughlin, March 2025

Payments pursuant to settlement agreements with industry regulators were not penalty payments so there was nothing that prevented them from being deductible from trading income for corporation tax purposes. 

The appellant companies (energy providers) were regulated by the energy regulator, Ofgem. The appellants entered into agreements with Ofgem in settlement of regulatory investigations into various matters. Under the settlement agreements, the appellants paid sums (called ‘penalties’) in nominal amounts (£1), together with payments to consumers, consumer groups and charities totalling approximately £28m. HM Revenue and Customs (HMRC) concluded that the appellants were wrong to deduct the £28m payments from their profits for corporation tax purposes and amended the appellants’ tax returns accordingly. The appellants appealed. The First-tier Tribunal (FTT) agreed with HMRC that most of the payments were not deductible.

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