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Revenue and Customs v Dolphin Drilling Ltd
Factual and Procedural Background
Part 8ZA of the Corporation Tax Act 2010 introduced a “hire cap” that limits the deduction of lease payments made between connected parties for certain movable offshore structures. “Company B,” a contractor providing tender-assisted drilling (“TAD”) services on an offshore platform (“the Oil Platform”), chartered a semi-submersible vessel (“the Vessel”) from its associated “Company C.” The Vessel supplied mud, cement, utilities, storage and—critically—up to 120 berths of accommodation, some of which were used by personnel employed by “Company A,” the platform operator.
For the accounting periods ending 31 December 2014 and 31 December 2015 Company B deducted the full bareboat charter fees. “The Tax Authority” issued closure notices applying the hire cap and increasing corporation tax by approximately £4 million and £2.6 million respectively. Company B appealed, succeeding before the First-tier Tribunal but losing before the Court of Appeal. The present judgment is the final appellate decision.
Legal Issues Presented
- What is the proper interpretation of the phrase “unlikely to be more than incidental to another use, or other uses” in section 356LA(3) CTA 2010?
- On the agreed facts, was the Vessel’s use to provide accommodation for offshore workers “incidental” to its TAD functions, so as to exclude it from the definition of a “relevant asset” and therefore from the hire cap?
Arguments of the Parties
Appellant (Company B)
- Legislative history shows the hire cap was intended to target drilling rigs and dedicated flotels; support vessels with mixed functions should fall outside the provision.
- Even under the Court of Appeal’s interpretation, the accommodation use was a mere consequence of the Vessel’s TAD operations and therefore incidental.
- If the Tax Authority’s view is correct, almost all support vessels would be caught merely because they contain surplus berths—an outcome Parliament could not have intended.
Respondent (The Tax Authority)
- Pre-legislative materials refer to “accommodation vessels” interchangeably with vessels that provide “accommodation services”; nothing confines the statute to pure flotels.
- “Incidental” bears its ordinary meaning; a use that serves an independent, significant purpose—such as accommodating up to 120 personnel—is not incidental.
- The contractual facts show accommodation was a separate, paid-for service essential to Company A’s staffing plans, not a trivial by-product.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Barclays Mercantile Business Finance Ltd v Mawson [2004] UKHL 51 | Tax statutes are interpreted purposively, like all legislation. | Supported adopting an ordinary-language, purpose-based reading of section 356LA. |
| Rossendale Borough Council v Hurstwood Properties (A) Ltd [2021] UKSC 16 | Endorsed purposive interpretation in tax contexts. | Cited to reinforce that context and purpose guide statutory meaning. |
| R (O) v Secretary of State for the Home Department [2022] UKSC 3 | Primary method of construing statutes is analysis of the enacted language; extraneous materials are secondary. | Used to emphasise that section 356LA(3) must be read principally by its wording. |
| Robson v Dixon [1972] 1 WLR 1493 | “Incidental to” denotes an activity without an independent purpose, undertaken only to further another purpose. | Provided linguistic guidance; the Court adopted the same ordinary meaning for “incidental.” |
Court's Reasoning and Analysis
Judge Hodge, writing for the unanimous court, began with the statutory text. Section 356LA(2) broadly covers movable structures that can provide accommodation for offshore workers, while subsection (3) carves out cases where such accommodation use is “unlikely to be more than incidental” to another use of the asset.
The Court held:
- “Incidental” bears its ordinary English meaning: a dependent, non-independent use that arises out of another use; quantitative triviality is not required but may be relevant.
- Pre-legislative documents did not confine the provision to pure flotels; indeed, subsection (3) presupposes multi-use vessels.
- The Vessel had two distinct contractual purposes: (1) provision of TAD services and (2) provision of up to 120 berths. The accommodation function was separately negotiated, paid for by Company A, and essential to staffing more than 60 workers on the Oil Platform.
- Because the accommodation function served an “independent end in itself, of some significance,” it was not incidental to the TAD function. The statutory exception therefore did not apply.
- Arguments that accommodation was a mere consequence of stationing the Vessel, or that surplus berths on other vessels would lead to over-breadth, were rejected: the factual centrality and contractual specificity of the accommodation service in this case precluded any finding of incidentality.
Holding and Implications
APPEAL DISMISSED. The Vessel is a “relevant asset”; the hire cap applies and the additional corporation tax assessed by the Tax Authority stands.
Practically, contractors operating mixed-function offshore vessels must treat substantial, separately-purposed accommodation services as an independent use, meaning lease deductions may be capped. The decision clarifies that “incidental” in section 356LA(3) hinges on independence of purpose rather than mere quantitative dominance, but the ruling sets no broader precedent beyond its statutory context.
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