The Commissioners for HMRC v Dolphin Drilling Ltd

Under section 356LA(3) of the Corporation Tax Act 2010, one use of an asset is incidental to another where it arises from, is connected with, or is a by-product of the other use. Relative importance alone is insufficient. A significant use serving an independent purpose is not incidental merely because it is secondary to a more important use.

The statutory assessment is objective and should ordinarily be made at the outset of the relevant accounting period. An offshore asset used for the independent and significant purpose of accommodating workers on another structure does not fall within the incidental-use exclusion. It may therefore be a relevant asset to which the statutory hire cap applies.

Dolphin Drilling Ltd leased the Borgsten, a converted drilling rig, from an associated company and supplied it to the operator of an offshore oil platform. The Borgsten provided tender-assisted drilling services and accommodated personnel working on the platform.

HMRC decided that the Borgsten was a relevant asset under section 356LA of the Corporation Tax Act 2010. It therefore applied the statutory hire cap to Dolphin’s lease payments. The First-tier Tribunal allowed Dolphin’s appeal, holding that the accommodation use was unlikely to be more than incidental to the vessel’s other uses. The Upper Tribunal dismissed HMRC’s appeal in [2022] UKUT 212 (TCC).

The central issue before the Court of Appeal was whether the tribunals had applied the correct meaning of an use being incidental to another use for the purposes of section 356LA(3).

1. Appeal allowed. The First-tier Tribunal had misdirected itself on the ordinary meaning of “incidental”, and the Upper Tribunal should have allowed HMRC’s appeal. Newey LJ and Peter Jackson LJ agreed with Nugee LJ’s judgment.

2. Ordinary statutory language should not unnecessarily be replaced with a verbal gloss. Although an incidental use will generally be of lesser or secondary importance, this does not mean that every subordinate or secondary use is incidental. Treating relative importance as the controlling test risks substituting different words for those enacted by Parliament.

3. A use will ordinarily be incidental to another use where it arises from that other use, is undertaken because of or in connection with it, or occurs as its by-product. Conversely, it is difficult to regard a use as incidental where it serves a significant independent purpose unconnected with the other use. “Merely incidental to” and “no more than incidental to” have the same meaning. The qualitative approach in Robson v Dixon [1972] 1 WLR 1493 assisted in identifying this relationship.

4. The First-tier Tribunal had focused on evidence showing that accommodation was less important than the Borgsten’s other functions. It had not asked whether accommodating workers from the Dunbar served a significant independent purpose or instead arose from the vessel’s other uses.

5. Accommodation served a significant independent purpose. The Dunbar had only 60 berths, while Total chose to have more than 60 personnel working there. Additional accommodation was therefore required. Total stipulated for accommodation, funded an increase to 120 berths and used the Borgsten as an accommodation vessel as well as for drilling-support services. That use was not incidental either to the provision of tender-assisted drilling services or to the accommodation of Dolphin’s own personnel.

6. The objective assessment required by section 356LA(3) of the Corporation Tax Act 2010 should ordinarily be made at the outset of the relevant accounting period. That timing point did not affect the result on the facts.

7. Section 356LA(3) did not apply. The Borgsten otherwise met the statutory requirements for a relevant asset, so the hire cap in section 356N applied during the accounting periods in question.

1. Court of Appeal (Civil Division): In [2024] EWCA Civ 1, allowed HMRC’s appeal. It held that the First-tier Tribunal had misdirected itself and that the hire cap applied.

2. Upper Tribunal (Tax and Chancery Chamber): In [2022] UKUT 212 (TCC), dismissed HMRC’s appeal and upheld the First-tier Tribunal’s decision.

3. First-tier Tribunal (Tax Chamber): In [2021] UKFTT 145 (TC), allowed Dolphin’s appeal. It concluded that the accommodation use fell within section 356LA(3) of the Corporation Tax Act 2010.