The “Arising-From” Test for Incidental Use:
Revenue and Customs v Dolphin Drilling Ltd ([2025] UKSC 24)

Introduction

In Revenue and Customs v Dolphin Drilling Ltd the United Kingdom Supreme Court resolved a long-running dispute about the scope of the “hire cap” introduced by Part 8ZA of the Corporation Tax Act 2010 (“CTA 2010”). At stake was whether the bareboat charter fees paid by Dolphin Drilling Ltd (“Dolphin”) for the semi-submersible Borgsten Dolphin could be fully deducted, or whether a statutory cap restricted the deduction. The answer turned entirely on the meaning of one short but crucial phrase in section 356LA(3) CTA 2010—whether the vessel’s use “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.”

By redefining what counts as “incidental” the Court set a significant precedent for tax legislation that employs the same or similar wording, and for the oil & gas industry’s structuring of multi-functional offshore assets.

Summary of the Judgment

The Supreme Court (Lord Hodge giving the only judgment, with Lords Burrows, Richards and Ladies Rose & Simler concurring) dismissed Dolphin’s appeal and restored the Court of Appeal’s decision. Key holdings were:

• “Incidental to” must be given its ordinary meaning: a use (A) is incidental to another use (B) only where A arises because of, or in connection with, B and serves no independent purpose.
• A use that is merely secondary or of lesser importance, yet serves an independent purpose, is not incidental.
• On the agreed facts the Borgsten performed two distinct functions—tender assisted drilling (“TAD”) services & substantial accommodation services—and the accommodation function was essential for Total’s project. It therefore failed the “incidental” carve-out, making the vessel a “relevant asset” subject to the hire cap in s 356N.
• Pre-legislative materials did not show an intent to restrict the cap to “pure” flotels; those materials could not override the ordinary meaning of the enacted words.
• The Court expressly endorsed Nugee LJ’s interpretation in the Court of Appeal, anchoring the meaning of “incidental” in the “arising-from” test first articulated by Pennycuick VC in Robson v Dixon [1972] 1 WLR 1493.

Analysis

1. Precedents Cited and Their Influence

• Robson v Dixon [1972] 1 WLR 1493
  Pennycuick VC’s definition—an incidental activity “does not serve any independent purpose but is carried out in order to further some other purpose”—was adopted almost verbatim. It provided the linguistic backbone for the “arising-from” test.
• Barclays Mercantile Business Finance Ltd v Mawson [2004] UKHL 51
  Cited to reaffirm the purposive approach to tax statutes; nevertheless, purposive interpretation begins with the statutory text. Lord Hodge used this to rebut reliance on pre-legislative consultation papers.
• Rossendale BC v Hurstwood [2021] UKSC 16
  Reiterated that tax statutes are construed purposively like any statute, but purpose cannot defeat clear words.

2. The Court’s Legal Reasoning

The reasoning proceeds in three steps:

1. Statutory Context. Section 356LA(2) defines a broad class of mobile structures. Section 356LA(3) provides a narrow, future-looking exception. The issue is whether accommodation use will be “no more than incidental” to other likely uses.
2. Ordinary Meaning. Rejecting the FTT’s and UT’s “subordinate/secondary” formulation, the Court applies the ordinary English meaning: incidental means “arising out of” or “by-product of” another use, lacking an independent purpose. A use of non-trivial significance cannot be incidental if it is an end in itself.
3. Application to Facts. The contract expressly required—and Total paid for—substantial accommodation capacity (raised from 102 to 120 berths). That accommodation was indispensable for staffing the Dunbar platform beyond its own 60 berths. Hence the accommodation use was an independent end. It did not merely arise out of TAD operations; it stood alongside them. Therefore the statutory exception in s 356LA(3) did not apply.

3. Impact of the Decision

The judgment has several forward-looking consequences:

• Narrower Escape Route. Multi-functional offshore assets providing significant accommodation will rarely satisfy the “incidental” carve-out, exposing their bareboat rental costs to the hire cap.
• Drafting & Transaction Structuring. Contractors may now need to separate accommodation services contractually, or use discrete assets (e.g., flotels) if they want to avoid the cap. The commercial habit of embedding accommodation inside support vessels becomes tax-risk-laden.
• General Tax Statutes. Although the Court cautioned against blanket transposition, the “arising-from” test is likely to influence courts interpreting “incidental to” across the tax code (e.g., s 40B CTA 2009, ss 38 & 58 TCGA 1992).
• Evidential Emphasis. The objective, ex-ante focus (“reasonable to suppose” at the start of an accounting period) directs taxpayers to maintain contemporaneous evidence of intended uses and relative economic significance.

Complex Concepts Simplified

• Hire Cap. A statutory ceiling on the amount of intra-group lease payments that can be deducted when calculating UK “ring fence” profits from oil & gas activities.
• Ring Fence Profits. Profits from UK oil & gas extraction taxed separately to prevent sheltering by losses from other businesses.
• Tender Support Vessel (TSV). A rig-like vessel moored alongside a platform to supply drilling-related services plus auxiliary amenities (warehousing, heli-deck, utilities, accommodation).
• Offshore Workers. Individuals who are accommodated on one structure but work on/from another (e.g., live on a TSV, work on a platform).
• Incidental Use – “Arising-From” Test. A use is incidental only if it flows from another use and lacks an independent goal or benefit of its own.

Conclusion

Revenue and Customs v Dolphin Drilling Ltd sets an authoritative interpretation of “incidental to” within section 356LA(3) CTA 2010, confirming that independence of purpose, not mere comparative importance, is the touchstone. The decision tightens the hire cap’s reach, influencing vessel-charter arrangements across the Continental Shelf and providing a lexical template for other tax provisions employing the language of “incidental”. Future litigants will need to demonstrate that the supposedly incidental activity is truly a by-product of, and not an additional objective alongside, the primary use. The ruling thus balances statutory purpose (preventing profit migration via connected-party charters) with linguistic fidelity, reinforcing the principle that textual clarity ultimately controls even in a purposive regime.