The First-tier Tribunal did not make an error in finding that payments pursuant to settlement agreements with industry regulators were non-deductible, but erred in treating an element of the payments as deductible when that payment was part of a package of payments having a penal character.  

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