Dolphin Drilling leased a tender support vessel (the Borgsten) to provide drilling support and accommodation at an oil platform. The Supreme Court held that providing accommodation to offshore workers was an independent use, not ‘incidental to’ drilling support services, and therefore the statutory hire cap on connected-party lease deductions applied.
Background
Dolphin Drilling Ltd (‘Dolphin’) was contracted by Total E&P UK Ltd (‘Total’) to provide tender assisted drilling (‘TAD’) services at the Dunbar oil platform in the North Sea. To do so, Dolphin leased a converted semi-submersible rig called the Borgsten Dolphin (‘the Borgsten’) from an associated company registered in Singapore, Borgsten Dolphin Pte Ltd (‘BDPL’), under a bareboat charter at over US$100,000 per day. The Borgsten was moored alongside the Dunbar and provided a range of drilling support services including mud and cement supply, utilities, workshops, warehousing, and a heliport.
Crucially, the Borgsten also provided accommodation. It initially had 102 berths, which were increased to 120 at Total’s request and cost. The Dunbar platform itself only had 60 berths, insufficient for all the Total personnel working there (averaging 60–80 depending on the phase). On average, around 58–59 Total personnel slept on the Borgsten, most of whom worked on the Dunbar and therefore qualified as ‘offshore workers’ under the statute.
Part 8ZA of the Corporation Tax Act 2010 (‘CTA 2010’), introduced by the Finance Act 2014, imposed a ‘hire cap’ restricting the deduction of lease payments between connected parties for ‘relevant assets’ used in the UK Continental Shelf. The aim was to prevent operators from shifting taxable profits offshore through inflated charter fees to associated non-UK entities.
The Issue
The central question was the interpretation of section 356LA(3) of the CTA 2010. Under section 356LA(2)(b)(ii), a ‘relevant asset’ includes a movable structure that can be used to provide accommodation for ‘offshore workers’—individuals who work on or from another structure. Section 356LA(3) provides an exception: an asset is not within subsection (2)(b)(ii) if:
it is reasonable to suppose that its 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.
If the Borgsten’s use to accommodate offshore workers was ‘unlikely to be more than incidental to’ its other uses (principally TAD services), then it would fall outside the hire cap. If not, the hire cap applied, and Dolphin owed additional corporation tax of approximately £6.7 million across the two accounting periods.
The Parties’ Arguments
Dolphin’s case
Dolphin advanced two principal arguments. First, it submitted that the legislative history demonstrated that HMRC had intended the hire cap to apply only to drilling rigs and dedicated accommodation vessels (‘flotels’), not to multi-purpose support vessels like the Borgsten. It argued that adopting HMRC’s broader interpretation would catch almost all support vessels with surplus accommodation capacity. Second, Dolphin argued that even on the Court of Appeal’s interpretation, the Borgsten’s provision of accommodation arose out of and was a consequence of its use to provide TAD services—it would not have been at the Dunbar at all but for the TAD contract—and therefore the accommodation use was incidental to the TAD use.
HMRC’s case
HMRC argued that the pre-legislative materials used ‘accommodation vessels’ and ‘accommodation services’ interchangeably, and there was no reliable basis for confining the provision to vessels whose sole function was accommodation. HMRC submitted that the accommodation provided to offshore workers was an independent and significant use of the Borgsten, separate from the TAD services, and therefore was not ‘incidental to’ those other uses.
The Court’s Reasoning
The unanimous judgment was delivered by Lord Hodge (with whom Lord Burrows, Lady Rose, Lord Richards and Lady Simler agreed).
The pre-legislative materials
Lord Hodge found that the pre-legislative consultation documents did not reliably support Dolphin’s contention that the legislation targeted only dedicated flotels. He noted:
There is in my view no reliable basis in those materials for the conclusion that the legislation so far as relevant was aimed at vessels whose sole function was to be used as a mobile offshore hotel. I note also that subsection (3), which is predicated on the assumption that a vessel has more than one use, is inconsistent with the argument that the only accommodation-providing asset within the scope of subsection (2) is one with the sole function of providing accommodation.
The meaning of ‘incidental to’
Lord Hodge agreed with the Court of Appeal’s analysis by Nugee LJ that the word ‘incidental’ in this statutory context bears its ordinary English meaning. He rejected the First-tier Tribunal’s approach that ‘incidental’ simply meant ‘subordinate’ or ‘secondary’. Lord Hodge stated:
In my view use A of an asset, which is important or even essential, can be secondary or subordinate to another use of the asset, use B. But if use A does not arise out of use B, it is an independent use and it is not incidental to use B.
He endorsed Nugee LJ’s formulation:
one would normally say that use A is incidental to use B if it arises out of use B, something that is done because of use B, or in connection with use B, or as a by-product of use B.
He further endorsed Nugee LJ’s application to the facts:
The use of the Borgsten for accommodation of those working on the Dunbar was not simply something that arose out of its use as a TSV supplying TAD services to Total. It was an independent end in itself, of some significance—indeed essential if Total was to be able to have more than 60 personnel working on the Dunbar at any one time as it wished.
Rejection of Dolphin’s alternative arguments
Lord Hodge rejected each of Dolphin’s alternative submissions. On the ‘but for’ argument—that the Borgsten would not have provided accommodation at all but for its connection to the Dunbar for TAD services—he held:
I reject the argument that because the Borgsten was connected to the Dunbar in order to provide TAD services, that made its provision of accommodation to the Total personnel incidental to the provision of the TAD services. In essence the submission is: but for the connection of the Borgsten to the Dunbar it would not have provided the accommodation services. That is not the test: use A must be incidental to use B of the Borgsten.
On the argument that all the Borgsten’s services shared the overarching aim of facilitating Total’s drilling campaign, Lord Hodge held that these arguments ‘founder on the same rock’.
On the contention that HMRC’s interpretation would catch all support vessels, Lord Hodge accepted that a trivial or casual use of surplus accommodation might be ‘incidental’, but observed that those were not the circumstances here:
While I would accept that a use of accommodation on a TSV which is trivial or casual may not be more than incidental to the provision of TAD services or some other use, those are not the circumstances of this appeal where Total stipulated for the use of extensive accommodation on the Borgsten and extra accommodation on the Borgsten was created for and paid for by Total.
Robson v Dixon and other statutory contexts
Lord Hodge considered the earlier authority of Robson v Dixon [1972] 1 WLR 1493, where Pennycuick V-C had held that ‘merely incidental to’ denotes an activity which ‘does not serve any independent purpose but is carried out in order to further some other purpose’. While acknowledging that the case concerned a different statutory provision, Lord Hodge found the analysis consistent with the interpretation he favoured. He declined to make any general ruling on the meaning of ‘incidental to’ in other statutory contexts, emphasising that regard must always be had to the specific statutory context.
Practical Significance
This decision confirms that the hire cap under Part 8ZA of the CTA 2010 applies to multi-purpose vessels which provide accommodation to offshore workers as an independent and significant use, even where such accommodation is secondary to the vessel’s primary function. ‘Incidental to’ requires that the use in question arises out of, or is a by-product of, the other use; it is not enough that it is merely subordinate or of lesser importance. The decision has direct implications for oil and gas contractors who lease support vessels from connected parties and whose vessels provide accommodation to workers on adjacent platforms. Such contractors cannot avoid the hire cap merely by demonstrating that accommodation was not the vessel’s primary purpose. The court was careful, however, to limit the scope of its ruling to the specific statutory context, declining to lay down a universal definition of ‘incidental’ for other legislative provisions.
Verdict: The appeal was dismissed. The Supreme Court unanimously upheld the Court of Appeal’s decision, holding that the Borgsten’s use to provide accommodation for offshore workers was not ‘incidental to’ its use to provide tender assisted drilling services within the meaning of section 356LA(3) of the Corporation Tax Act 2010. The Borgsten was therefore a ‘relevant asset’ subject to the statutory hire cap, and HMRC’s closure notices imposing additional corporation tax were upheld.
Source: Commissioners for HMRC v Dolphin Drilling Ltd [2025] UKSC 24
