The Commissioners for HMRC v Dolphin Drilling Ltd

The Court of Appeal allowed HMRC's appeal and held that the Borgsten Dolphin was a "relevant asset" within s.356LA CTA 2010 and so the hire cap in s.356N applied. The central question was the meaning of the statutory phrase in s.356LA(3) whether it was "reasonable to suppose" that the asset's use to provide accommodation for offshore workers "is unlikely to be more than incidental" to another use. The court determined that "incidental" requires a connection where the secondary use arises out of, is tied to, or is a by-product of the primary use, not merely that it is of lesser or subordinate importance. On the facts the provision of accommodation for personnel working on the Dunbar was a significant, independent use of the Borgsten and therefore not "no more than incidental" to its other uses; consequently s.356LA(3) did not exclude the Borgsten from s.356LA(2)(b)(ii).

The Court rejected the First-tier Tribunal's approach of equating "incidental" with being subordinate or secondary in importance. The FTT's analysis was treated as a misdirection of law and the Upper Tribunal's dismissal of HMRC's appeal was set aside.

Background and parties. HMRC appealed to the Court of Appeal from the Upper Tribunal. The respondent, Dolphin Drilling Ltd, had leased the vessel Borgsten Dolphin from an associated Singapore company and provided it to Total E&P UK Ltd as a tender support vessel (TSV) supplying tender-assisted drilling (TAD) services to the Dunbar platform. The dispute concerned whether payments under the bareboat charter were subject to the "hire cap" in Part 8ZA of the Corporation Tax Act 2010 (as inserted by the Finance Act 2014).

Nature of the application. HMRC sought to apply the hire cap (s.356N CTA 2010) to restrict the deduction of intra-group hire payments on the ground that the Borgsten was a "relevant asset" under s.356LA because it could be used to provide accommodation for offshore workers. Dolphin had appealed closure notices in the FTT and the UT accepting that the exception in s.356LA(3) applied.

Procedural history. Dolphin succeeded before the First-tier Tribunal ([2021] UKFTT 145 (TC)). HMRC's appeal to the Upper Tribunal was dismissed ([2022] UKUT 212 (TCC)). HMRC obtained permission to appeal to the Court of Appeal, which heard argument on whether the FTT had misdirected itself in law.

Issues framed by the court. The court framed the legal issue as statutory construction: what does it mean for an asset's use to provide accommodation for offshore workers to be "unlikely to be more than incidental" to another likely use of the asset (s.356LA(3))? Was the FTT correct to treat "incidental" as meaning merely "subordinate" or "secondary" in importance?

Court's reasoning. The Court of Appeal emphasised ordinary usage of "incidental" and accepted that it should not be redefined by substitution. The correct approach is to ask whether the secondary use arises out of, is tied to, or is a by-product of the primary use, or is an independent purpose unconnected to it. The court applied Robson v Dixon and concluded the FTT had asked the wrong question by focusing on relative importance rather than connection between uses. On the facts, the accommodation function of the Borgsten was a significant, independent use (and operationally essential to Total's chosen staffing levels), not merely incidental to the TSV/TAD functions or to accommodation of Dolphin's own crew. Therefore s.356LA(3) did not exclude the Borgsten and the hire cap applied.

Subsidiary findings and implications. The court explained when to assess the likelihood (at the outset of the relevant accounting period) and noted that the legislative background showed Parliament intended to target rigs and accommodation vessels; however the outcome turned on statutory language and ordinary meaning. The remedy was to allow HMRC's appeal and apply the hire cap for the accounting periods in question.

Appeal allowed. The Court of Appeal concluded that the First-tier Tribunal misdirected itself by treating "incidental" as equivalent to being subordinate or secondary in importance. "Incidental" in s.356LA(3) requires a connection such that the accommodation use arises out of, or is tied to, another use; the Borgsten's accommodation function for personnel working on the Dunbar was a significant, independent use and therefore not "no more than incidental". Consequently the Borgsten fell within s.356LA(2)(b)(ii) and was a relevant asset, so the hire cap under s.356N CTA 2010 applied.

FTT allowed Dolphin: [2021] UKFTT 145 (TC). UT dismissed HMRC's appeal: [2022] UKUT 212 (TCC). Court of Appeal allowed HMRC's appeal: [2024] EWCA Civ 1.