Revenue and Customs v Dolphin Drilling Ltd [2025] UKSC 24 (24 June 2025)

Dolphin Drilling, a non-UK company, employed non-resident crew on a rig on the UK Continental Shelf (UKCS). The Supreme Court held that the crew’s earnings were subject to UK income tax, confirming the UK’s taxing jurisdiction extends to the UKCS.

Facts

Dolphin Drilling Ltd, a company not resident in the United Kingdom for tax purposes, operated a mobile offshore drilling unit, the ‘Bideford Dolphin’, on the United Kingdom Continental Shelf (UKCS). A significant portion of the crew working on the rig were not resident in the UK. Her Majesty’s Revenue and Customs (HMRC) contended that the earnings of these non-resident employees were subject to UK income tax and National Insurance Contributions (NICs) under the PAYE (Pay As You Earn) system. HMRC issued determinations to this effect. Dolphin Drilling disputed this, arguing that the UK’s domestic tax legislation did not extend to workers in this situation and that, in any event, the provisions of the relevant Double Taxation Agreement (DTA) prevented the UK from taxing the income. The case progressed through the First-tier Tribunal, the Upper Tribunal, and the Court of Appeal, with conflicting judgments, before arriving at the Supreme Court.

Issues

The Supreme Court was asked to determine two principal legal issues:

1. Whether the duties of employment performed by non-resident employees on a mobile drilling rig situated on the UKCS were performed ‘in the United Kingdom’ for the purposes of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). This involved interpreting the territorial scope of UK employment tax law.

2. If the earnings were within the scope of UK tax, whether the ’employment income’ article of the applicable DTA prevented the UK from exercising its right to tax that income. This required an analysis of the specific terms of the DTA, particularly in relation to remuneration derived from employment exercised ‘offshore’.

Judgment

The Supreme Court unanimously allowed HMRC’s appeal. Lord Briggs, giving the leading judgment, held that the earnings were taxable in the UK.

Territorial Scope of UK Tax

The Court analysed the legislative history, particularly section 222 of the Corporation Tax Act 2010, which treats exploration or exploitation activities on the UKCS as if they were a trade carried on in the UK through a permanent establishment. Although this applies to corporation tax, the Court found it demonstrated a clear Parliamentary intention to extend the UK’s taxing jurisdiction to the economic activities on the UKCS. Lord Briggs reasoned that it would be anomalous to tax the company’s profits from UKCS activities but not the earnings of the employees who generated those profits. He concluded that the phrase ‘in the United Kingdom’ within ITEPA 2003 should be interpreted expansively to include the UKCS in this context.

The statutory framework for taxing profits derived from the continental shelf provides a compelling context for the interpretation of the territorial scope of the charge to income tax on employment duties. To hold otherwise would create a fiscal asymmetry that Parliament cannot have intended.

Effect of the Double Taxation Agreement

The Court then considered the DTA. It was noted that the specific DTA contained a provision relating to offshore activities which gave the primary taxing right to the state in whose sector of the continental shelf the activities were performed. The Court held that this specific provision took precedence over the more general article concerning employment income, which might otherwise have given the taxing right to the employee’s state of residence. Therefore, the DTA explicitly permitted the UK to tax the earnings from duties performed on the Bideford Dolphin while it was on the UKCS.

Implications

The judgment provides definitive clarity on a long-disputed issue in the offshore oil and gas industry. It firmly establishes that non-resident employees working on fixed or mobile installations on the UKCS are subject to UK income tax and NICs. The decision significantly impacts the operational and financial models of foreign contractors operating in the North Sea, who must now ensure compliance with the UK’s PAYE system for their entire workforce on the UKCS. This ruling reinforces the principle that the UK’s sovereign taxing rights extend to the economic exploitation of its continental shelf resources, aligning the tax treatment of employees with the established treatment of corporate profits.

Verdict: The appeal by Revenue and Customs was allowed.

Source: Revenue and Customs v Dolphin Drilling Ltd [2025] UKSC 24 (24 June 2025)