Compensation payments have a character of penalties

The taxpayers are energy providers. After an investigation for mis-selling by Ofgem the companies agreed settlement terms under which they made redress payments and paid penalties.

HMRC said these payments were not tax deductible. The taxpayer appealed.

The First-tier Tribunal concluded that payments to ‘make good the loss the customer had suffered’ were allowable. The other redress payments although also wholly and exclusively incurred for the purposes of the trade were in the nature of penalties and therefore not tax deductible.

The taxpayer and HMRC appealed.

The Upper Tribunal considered the First-tier Tribunal had been wrong to distinguish between punitive payments and compensatory ones. It should have considered whether overall the payments had a punitive character. It would be necessary to take into account all the circumstances including the reasons why the payment was made to whom the payment was made and the extent to which...