The Commissioners for HMRC v Dolphin Drilling Limited

For the accommodation exception in section 356LA(3) of the Corporation Tax Act 2010, whether use of an asset to accommodate offshore workers is incidental is a qualitative and relational question. The use must be subordinate or secondary to another likely use. It is not enough simply to rank anticipated uses by importance, and a use may be important, desirable or sought-after while still being incidental in its full context.

The statutory inquiry is objective and requires a realistic, multi-factorial assessment of likely uses. The contractual terms are important but are not conclusive. Evidence of negotiations and actual use may properly inform the assessment of likely use.

HMRC appealed against the First-tier Tribunal’s decision allowing Dolphin Drilling Limited’s appeals against corporation tax closure notices for 2014 and 2015.

Dolphin Drilling had bareboat-chartered a converted drilling rig, the Borgsten Dolphin, from an associated company. It used the vessel to provide tender-assisted drilling services to the Dunbar platform under a contract with Total. The vessel also had accommodation used by personnel, including many working on the platform.

The issue was whether the vessel fell within the accommodation exception in section 356LA(3) of the Corporation Tax Act 2010. If it did, it was not a relevant asset subject to the statutory hire cap. HMRC contended that the FTT had misunderstood “incidental” and had wrongly considered material beyond the written contract.

1. Appeal dismissed. The FTT made no error of law in concluding that the Borgsten was outside the definition of a relevant asset because its likely use to provide accommodation for offshore workers was unlikely to be more than incidental to its other likely uses.

2. The exception in section 356LA(3) of the Corporation Tax Act 2010 calls for an objective and realistic assessment of the relationship between likely accommodation use and the other likely uses of the asset. The word “incidental” bears its ordinary meaning. It denotes use that is subordinate or secondary to another use, rather than a test requiring identification of a main or primary use.

3. The inquiry is qualitative, not simply quantitative. A use may be important, desirable or sought-after and yet remain incidental when viewed in context. The FTT had not found that accommodation for offshore workers was essential. The Upper Tribunal therefore left open whether an essential use could be incidental.

4. The assessment is multi-factorial. Although the Total contract was important, section 356LA(3) required an assessment of likely use rather than construction of that contract alone. The FTT could consider contractual negotiations, the parties’ evidence and actual use, since each could shed light on likely use. It was also material that the hire cap under section 356N applies to payments under the associated-party lease for each accounting period.

5. HMRC’s complaints about the FTT’s weighting of evidence were, in substance, an impermissible challenge to factual findings. The FTT’s findings and evaluation were open to it.

• Upper Tribunal (Tax and Chancery Chamber): HMRC’s appeal was dismissed.

• First-tier Tribunal: Allowed Dolphin Drilling Limited’s appeals against HMRC’s closure notices. The decision was released on 16 November 2020.