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

Dolphin Drilling Ltd leased a tender support vessel (Borgsten) from a connected party to provide drilling support services and accommodation to offshore workers. HMRC applied a hire cap restricting tax deductions for the lease payments. The Supreme Court held that providing accommodation was an independent use, not incidental to other services, upholding the hire cap.

Facts

Dolphin Drilling Ltd contracted with Total E&P UK Ltd to provide tender assisted drilling (TAD) services at the Dunbar oil platform using a vessel called the Borgsten Dolphin. The Borgsten was leased from an associated company registered in Singapore, Borgsten Dolphin Pte Ltd, on a bareboat charter. The vessel provided drilling support services including mud storage and pumping, cement storage, utilities, and accommodation. Total required accommodation for approximately 40 of its personnel on the Borgsten, as the Dunbar platform had insufficient berths for all workers. Total paid for modifications to increase the Borgsten’s accommodation capacity from 102 to 120 berths.

Issues

The central issue was whether the Borgsten fell within the definition of a ‘relevant asset’ under section 356LA of the Corporation Tax Act 2010, thereby subjecting Dolphin’s lease payments to a hire cap that restricted tax deductions. Specifically, the court had to determine whether the use of the Borgsten to provide accommodation for offshore workers was ‘unlikely to be more than incidental’ to its other uses, which would exclude it from the hire cap under section 356LA(3).

Judgment

The Supreme Court unanimously dismissed Dolphin’s appeal. Lord Hodge, delivering the judgment, held that the Court of Appeal had correctly interpreted the meaning of ‘incidental to’ in section 356LA(3). The court rejected Dolphin’s argument that ‘incidental’ meant merely ‘secondary’ or ‘subordinate’.

If I can express it in my own words, 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.

Lord Hodge endorsed the Court of Appeal’s reasoning and 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.

The court found that the provision of accommodation services was a separate, independent use that did not arise out of the TAD services. Total had specifically contracted for accommodation and paid for additional berths, demonstrating that accommodation was an independent purpose of significance.

Arguments Rejected

The court rejected Dolphin’s ‘but for’ argument – that the Borgsten would not have provided accommodation services but for its connection to the Dunbar to provide TAD services. Lord Hodge stated that this was not the correct test; the question was whether use A (accommodation) was incidental to use B (TAD services) of the Borgsten itself.

Implications

This case clarifies the interpretation of ‘incidental to’ in section 356LA(3) of the Corporation Tax Act 2010. A use is only incidental to another use if it arises out of, is connected to, or is a by-product of that other use. A use that serves an independent purpose of significance, even if secondary or subordinate, is not incidental. The decision confirms that vessels providing both drilling support services and substantial accommodation services to offshore workers may be subject to the hire cap, restricting tax deductions for lease payments between connected parties. The judgment emphasises the importance of examining the contractual arrangements and the significance of each use when determining whether the exception in subsection (3) applies.

Verdict: Appeal dismissed. The hire cap under section 356N of the Corporation Tax Act 2010 applied to Dolphin's lease payments because the Borgsten's use to provide accommodation for offshore workers was not merely incidental to its other uses but was an independent use of significance.

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