Commissioners for His Majesty’s Revenue and Customs v Dolphin Drilling Ltd

The Supreme Court considered the meaning of section 356LA(3) of the Corporation Tax Act 2010, in particular the statutory phrase whether the use of a structure to provide accommodation for "offshore workers" is "unlikely to be more than incidental to another use, or other uses" to which the asset is likely to be put. The Court applied a purposive approach but gave the words "incidental to" their ordinary meaning: a use is incidental to another only if it arises out of, is done because of, or is connected to that other use and does not serve an independent purpose of its own.

Applying that test to the facts found by the First-tier Tribunal, the Court held that the Borgsten Dolphin’s provision of accommodation for personnel working on the Dunbar was an independent, significant use and did not merely arise out of its use to provide tender assisted drilling services. Consequently the asset fell within section 356LA(2) and was subject to the hire cap in section 356N.

Background and parties: This is an appeal by Dolphin Drilling Ltd against the Commissioners for His Majesty’s Revenue and Customs concerning the tax treatment of amounts paid under a bareboat charter of the Borgsten Dolphin, a vessel converted to provide tender assisted drilling (TAD) services and accommodation alongside the Dunbar drilling platform.

Procedural history:

• The First-tier Tribunal allowed Dolphin’s appeal ([2021] UKFTT 145 (TC)).
• The Upper Tribunal dismissed HMRC’s appeal ([2022] UKUT 212 (TCC)).
• The Court of Appeal allowed HMRC’s appeal ([2024] EWCA Civ 1), holding the FTT had erred in law on the meaning of "incidental".
• On further appeal the Supreme Court heard the case and delivered this judgment.

Nature of the claim / relief sought: Dolphin sought to resist HMRC closure notices amending its corporation tax returns for the years ending 31 December 2014 and 31 December 2015, relying on section 356LA(3) CTA 2010 to exclude the Borgsten from the statutory definition of a "relevant asset" and so avoid the hire cap in section 356N.

Issues framed: The primary issue was whether the phrase in section 356LA(3) that an asset is excluded where "its use to provide accommodation for offshore workers is unlikely to be more than incidental to another use" should be given the ordinary meaning of "incidental to" (a use that arises out of or is done because of another use) or a broader meaning that captures any subordinate or secondary use.

Reasoning and subsidiary findings: The Court emphasised that statutory language is to be construed purposively but that ordinary words must be analysed in context. The words in subsection (3) set an objective, forward‑looking test assessed against contractual arrangements at the start of the accounting period. The Court accepted the Court of Appeal’s interpretation that a use is incidental only if it arises out of, or is done to further, the other use and does not serve an independent purpose. On the established facts, the Borgsten provided substantial accommodation capacity (increased and paid for by Total) and accommodation was an independent and significant use distinct from the provision of TAD services. Therefore subsection (3) did not apply and the asset fell within subsection (2), bringing it within the hire cap in section 356N.

Conclusion: The Supreme Court dismissed Dolphin’s appeal and therefore upheld the Court of Appeal’s conclusion that the hire cap applied to the payments under the bareboat charter.

Appeal dismissed. The Court held that the phrase "incidental to" in section 356LA(3) is to be given its ordinary meaning: a use is incidental only if it arises out of, or is done to further, another use and does not serve an independent purpose. The Borgsten’s provision of accommodation was an independent and significant use, not merely incidental to its TAD services, so the asset fell within section 356LA(2) and the hire cap in section 356N applied.

FTT allowed Dolphin ([2021] UKFTT 145 (TC)); Upper Tribunal dismissed HMRC’s appeal ([2022] UKUT 212 (TCC)); Court of Appeal allowed HMRC’s appeal ([2024] EWCA Civ 1); appeal to the Supreme Court dismissed ([2025] UKSC 24).