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The taxpayers held electricity generation licences. After an investigation for mis-selling by Ofgem, the companies agreed settlement terms. Under these arrangements, the companies made redress payments and paid penalties.
The issue arose as to whether the redress payments were tax deductible.
The First-tier Tribunal concluded that £554,013 paid directly to affected customers should be described as compensating customers who were mis-sold. The payments were to ‘make good the loss the customer had suffered’. The liability arose because of the company’s purpose in carrying out the acts that gave rise to the breach and as such it was incurred wholly and exclusively for the purposes of the trade.
However, 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. Similarly, the payments to charities were not allowable.
The taxpayers’ appeal was allowed in part.
