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

Under section 356LA(3) of the Corporation Tax Act 2010, accommodation use is incidental to another use only where it arises out of that other use. A use serving a separate, independent purpose is not incidental merely because it is secondary, subordinate or directed towards the same wider commercial objective.

The provision establishes an objective and prospective test, applied at the start of the accounting period against the contractual background. Trivial or casual accommodation use may be incidental. The meaning of “incidental” remains sensitive to the particular statutory context.

Dolphin Drilling Ltd leased the Borgsten Dolphin from an associated company and supplied it to support drilling operations on an offshore platform. The vessel provided tender-assisted drilling services and extensive accommodation for workers based on the platform. HMRC decided that the connected-party lease payments were subject to the hire cap in Part 8ZA of the Corporation Tax Act 2010.

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 further appeal: [2024] EWCA Civ 1; [2024] Ch 255.

The central issue before the Supreme Court was whether the vessel’s accommodation use was unlikely to be more than incidental to its other uses within section 356LA(3).

1. Appeal dismissed. Lord Hodge gave the unanimous judgment. The Borgsten Dolphin was a relevant asset subject to the hire cap under section 356N(2) of the Corporation Tax Act 2010.

2. Section 356LA(3) creates an objective and prospective test. At the start of the accounting period, the court must assess the likely uses of the asset against the background of what the parties have contracted for. The accommodation use must be compared with another use or uses of the same asset.

3. The phrase “incidental to another use” bears its ordinary meaning in this statutory context. An accommodation use is incidental where it arises out of the other use. A separate use serving an independent purpose is not incidental merely because it is secondary, subordinate or less important. Lord Hodge approved Nugee LJ’s analysis in the Court of Appeal and regarded the approach in Robson v Dixon [1972] 1 WLR 1493 as consistent with that meaning.

4. The vessel’s accommodation service was independent of its tender-assisted drilling services. Total had contracted for extensive accommodation, paid to increase the vessel’s capacity and needed that accommodation to deploy more personnel on the platform than the platform itself could house. The shared objective of facilitating the drilling campaign did not make one use incidental to the other. Nor was the required relationship established by showing that the accommodation would not have been provided but for the drilling-support services.

5. Trivial or casual use of spare accommodation on a support vessel may be no more than incidental. This case involved substantial accommodation specifically contracted and paid for, so that possibility did not assist Dolphin.

6. The pre-legislative materials did not confine the hire cap to vessels whose sole purpose was to operate as offshore hotels. Section 356LA(3) itself assumes that an asset may have more than one use.

7. The meaning of “incidental” must be determined in its statutory context. The court therefore declined to rule on the meaning of that expression in other taxing statutes.

1. United Kingdom Supreme Court: Dismissed Dolphin’s appeal in [2025] UKSC 24, affirming the Court of Appeal’s conclusion that the hire cap applied.
2. Court of Appeal: Allowed HMRC’s appeal in [2024] EWCA Civ 1; [2024] Ch 255. It held that the First-tier Tribunal had applied the wrong meaning of “incidental”.
3. Upper Tribunal: Dismissed HMRC’s appeal in [2022] UKUT 212 (TCC), holding that the First-tier Tribunal had made no error of law.
4. First-tier Tribunal: Allowed Dolphin’s appeal in [2021] UKFTT 145 (TC). It concluded that the accommodation use was unlikely to be more than incidental to the vessel’s other uses.