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You are here: BAILII >> Databases >> United Kingdom Supreme Court >> Revenue and Customs v Dolphin Drilling Ltd [2025] UKSC 24 (24 June 2025) URL: https://www.bailii.org/uk/cases/UKSC/2025/24.html Cite as: [2025] UKSC 24, [2025] WLR(D) 335, [2026] AC 29, [2025] 3 WLR 124 |
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[2025] UKSC 24
On appeal from: [2024] EWCA Civ 1
JUDGMENT
Commissioners for His Majesty's Revenue and Customs (Respondent)
v
Dolphin
Drilling
Ltd (Appellant)
before
Lord Hodge, Deputy President
Lord Burrows
Lady Rose
Lord Richards
Lady Simler
JUDGMENT GIVEN ON
24 June 2025
Heard on 13 February 2025
Nicola Shaw KC
Harry Winter
(Instructed by Ernst & Young LLP (London))
Respondent
David Ewart KC
Quinlan Windle
(Instructed by HMRC Solicitor's Office & Legal Services (Stratford))
Lord Hodge (with whom Lord Burrows, Lady Rose, Lord Richards and Lady Simler agree):
drilling
rigs and accommodation vessels between such connected parties.
(1) The relevant statutory provisions
"(1) This section applies if the contractor makes, or is to make, one or more payments under a lease of—
(a) a relevant asset, or
(b) part of a relevant asset.
(2) The total amount that may be brought into account in respect of the payments for the purposes of calculating the contractor's ring fence profits in an accounting period is limited to the hire cap."
"(1) In this Part 'relevant asset' means an asset within subsection (2) in respect of which conditions A and B are met.
(2) An asset is within this subsection if it is a structure that—
(a) can be moved from place to place (whether or not under its own power) without major dismantling or modification, and
(b) can be used to—
(i)
drill
for the purposes of searching for, or extracting, oil, or
(ii) provide accommodation for individuals who work on or from another structure used in a relevant offshore area for, or in connection with, exploration or exploitation activities ('offshore workers').
(3) But 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. (Emphasis added)
(4) In subsection (2)—
'oil' means any substance capable of being won under the authority of a licence granted under Part 1 of the Petroleum Act 1998 or the Petroleum (Production) Act (Northern Ireland) 1964;
'structure' includes a ship or other vessel.
(5) Condition A is that the asset, or any part of the asset, is leased (whether by the contractor or not) from an associated person other than the contractor.
(6) Condition B is that the asset is of the requisite value.
(7) The asset is of the 'requisite value' if its market value is £2,000,000 or more."
(2) The factual background
drilling
activities at the Dunbar oil platform ("Dunbar") in the North Sea on the UK Continental Shelf. The Dunbar is a "minimum facility
drilling
platform" which has a
drilling
derrick but lacks facilities which are essential for active
drilling
operations. To enable the Dunbar to perform such operations it needs the support of a tender support vessel ("TSV"), which is designed to provide tender assisted
drilling
("TAD") services.
drilling
platform the TSV is moored alongside the platform and connected by a gangway and an assortment of hoses. When connected the TSV and the platform effectively form an integrated unit during the
drilling
campaign. TSVs are distinct from accommodation vessels, the sole purpose of which is to be used as a mobile offshore hotel. Such accommodation vessels are commonly called "flotels".
drilled
for several years. Total intended to recommence
drilling
for a three-year period in 2012. To that end it needed a TSV to be connected to the Dunbar. This was achieved by the contractual arrangements which I describe below.
Dolphin
Drilling
Ltd ("
Dolphin")
to tender for the provision of a TSV which supplied mud storage and pumping, cement storage and pumping, utilities and accommodation. In August 2011
Dolphin
submitted a tender in which it proposed to use a rig called "the Borgsten
Dolphin"
("the Borgsten"), which it obtained from an associated company registered in Singapore, Borgsten
Dolphin
Pte Ltd ("BDPL").
drilling
rig and was at the end of its useful life in that role but could be converted into a TSV. It had two decks, each the size of a football pitch. A significant majority of the space on board was used for the provision of TAD services but at the time of the invitation to tender it also had the capacity to accommodate 102 persons on board. In the negotiations with Total, it was envisaged that the Borgsten while operating as a TSV would have its own crew who were either the employees of
Dolphin
or of its subcontractors. Those employees would number around 55 and be accommodated on the Borgsten. It was expected that there would be some 47 surplus berths on board.
Dolphin
the contract to supply TAD services to the Dunbar, and a contract for the provision of TSV
drilling
services was signed on 1 February 2012. The contract stated that the Borgsten was to provide accommodation for 102 persons, with Total requiring accommodation for 40 Total personnel. While this contract was being put in place, Total, which wished to commence
drilling
promptly, requested
Dolphin
to study the consequences in terms of cost and scheduling of increasing the accommodation capacity of the Borgsten from 102 to 120 persons. On 1 May 2012 Total and
Dolphin
agreed to a change order, which increased the accommodation to be provided on the Borgsten to 120 berths, and instructed the needed modifications to the Borgsten at a cost in total of US$6,700,800, for which Total paid.
Dolphin
leased the Borgsten from BDPL on a bareboat charter, paying a charter fee of initially over US$100,000 per day. The Borgsten was moved into position alongside the Dunbar in February 2013. The contract between Total and
Dolphin
stipulated for services to be provided in a pre-
drilling
phase which was originally expected to last 120 days, followed by a fully operational period when the Dunbar's
drilling
operations would be under way. The pre-
drilling
phase was extended until April 2015 because the upgrade works on the Dunbar took longer to complete than had been expected.
drilling
support services. Those services include: (i) the uninterrupted supply of
drilling
mud, water, compressed air and cement to the platform, (ii) the provision of facilities, including warehousing, storage of materials, workshops with welding and machine facilities, deck storage, laboratory space, and office and conferencing facilities for the TSV crew as well as the operator's personnel working on board the TSV, and blowout protection, and (iii) functions such as a heliport and living space, including leisure, hospital, galley, mess and sleeping accommodation.
drilling
phase the Borgsten was connected to the Dunbar and was operational. It had a full crew. It established an efficient interface with the Dunbar and was kept in a constant state of readiness. Its day-to-day activities were largely the same in both the pre-
drilling
and the
drilling
phases. The Borgsten (i) ran the mud systems in a closed loop, (ii) supplied water and compressed air, and (iii) provided warehousing, heliport, welding and machine shop, deck storage, cranes, wharf, office and accommodation facilities.
Dolphin
personnel") were either
Dolphin's
employees or sub-contractors. The number of
Dolphin
personnel working on the Borgsten in the pre-
drilling
period was usually around 55. Once
drilling
commenced, the number was in the range of 45 to 59 with an average of 52.
drilling
phase, there was an average of around 80 Total personnel working on the Dunbar. In the
drilling
phase the numbers were in the range of 60 to 70.
drilling
phase, the number of Total personnel who slept on the Borgsten was on average 58. Once
drilling
commenced, the average remained largely the same (59) although the range was wider, from 26 to 72. During the pre-
drilling
phase, some 53-54 of the average 58 Total personnel sleeping on the Borgsten worked solely or partly on the Dunbar while four or five worked only on or from the Borgsten. In the
drilling
phase, about 9 or 10 of the Total personnel worked only on the Borgsten and 49 or 50 of the Total personnel sleeping on the Borgsten worked on the Dunbar.
(3)
Dolphin's
tax returns and HMRC's closure notices
Dolphin's
tax returns for the accounting periods ending 31 December 2014 and 31 December 2015. In preparing those tax returns
Dolphin
assumed in each period that it was entitled to take into account in the calculation of its profits the entirety of the fees which it paid to BDPL. HMRC took the view that the hire cap applied and on 15 January 2018 issued a closure notice amending the tax return for the period to 31 December 2014 to show that further corporation tax was payable. On review by HMRC an error in the initial calculation was identified and the additional tax payable was stated to be £4,039,309.26. HMRC issued a similar closure notice for the accounting period ended on 31 December 2015 in which it stated that the additional corporation tax for that period was £2,691,385.73.
(4) The legal proceedings
Dolphin
appealed to the First-tier Tribunal ("FTT"). The focus of the appeal was on the meaning of the words in section 356LA(3) and, in particular, whether it was reasonable to suppose that the use of the Borgsten to provide accommodation for those working on the Dunbar was unlikely to have been more than incidental to other uses of the Borgsten. The FTT (Judge Jeanette Zaman and Mr Duncan McBride) allowed the appeal in a decision dated 16 November 2020 [2021] UKFTT 145 (TC). They concluded that it was reasonable to suppose that the use of the Borgsten to provide accommodation for those working on the Dunbar was unlikely to have been more than incidental to other uses of the Borgsten.
"incidental does not need to be confined to uses which are trivial; it can capture uses which, whilst being desirable, sought-after or even important are nevertheless, when viewed in context, secondary to (or less important than) another use or uses." (Emphasis added)
"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. Using a laptop to write a shopping list does not arise out of using it to write opinions—it is an independent end in itself, unconnected with the writing of opinions, albeit no doubt very much a subordinate or secondary or lesser one."
"I agree that it is difficult to regard use A as merely incidental to use B if it serves an independent purpose of its own, unconnected with use B, at any rate if that purpose is of some significance and not trivial or casual. And, contrary to a submission by Ms Shaw, I see no difference between use A being 'merely incidental to' use B and use A being 'no more than incidental to' use B. These to my mind mean the same thing."
"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. ... Put simply the Borgsten was not only used to provide TAD services to the Dunbar, it was also used as an accommodation vessel for the Dunbar. This may have been a 'secondary' use, but it was a significant and independent use and not incidental to its other uses."
(5) The appeal
Dolphin
appeals to this court. Nicola Shaw KC, who has appeared for
Dolphin
throughout the proceedings below, advances two principal arguments against the reasoning of the Court of Appeal. In summary, she submits, first, that the FTT were correct in their interpretation of the provision because its legislative history showed that HMRC, after consultation with the oil and gas industry, had confined the hire cap to
drilling
rigs and accommodation vessels, such as flotels. She submitted that HMRC's interpretation would catch almost all support vessels as they can be expected to have surplus accommodation which can be used to provide accommodation services. If the statutory provision could support either the interpretation put on it by the FTT or that of the Court of Appeal and both were in line with the purpose of the legislation, the court did not have to adopt the most restrictive meaning and it was sufficient that the facts satisfied one of the interpretations. Secondly, if the Court of Appeal's interpretation of the statutory words were correct, the hire of the Borgsten fell outside the scope of section 356LA(3) because the Borgsten would not have been used at all but for its use to provide TAD services, which were necessary for Total's
drilling
campaign. The use of the Borgsten to accommodate offshore workers was a consequence of its use to provide TAD services. The use of the Borgsten (i) to accommodate offshore workers and (ii) to provide TAD services shared the aim of facilitating Total's
drilling
campaign on the Dunbar.
(6) The interpretation of section 356LA of the CTA 2010
"An asset is within this subsection if it is a structure that—
(a) can be moved from place to place ... , and
(b) can be used to—
(i)
drill
for the purposes of searching for, or extracting, oil, or
(ii) provide accommodation for individuals who work on or from another structure used in a relevant offshore area ... ('offshore workers')."
This subsection addresses the nature of the vessel or structure (the "relevant asset") and what it can be used to do. It is a widely framed provision. Beyond this subsection and the imposition in section 356N of the hire cap to ring fence the contractor's profits, there is no suggestion of anything in the statutory context which casts light on the meaning of subsection (3).
Dolphin
submits, a consultation document, entitled "Oil and Gas Bareboat Chartering" and issued in February 2014 after the Government had announced its intention to introduce a hire cap, identified asset types which were provided under bareboat arrangements as including "
drilling
rigs" and "flotels". But in a document entitled "Overview of Tax Legislation and Rates" which HMRC and HM Treasury published on 19 March 2014 the target of the hire cap in the Finance Bill 2014 was stated as "the amount allowed as a deduction for these charters to companies that provide
drilling
services or accommodation services on the UK Continental Shelf" (emphasis added). The Technical Note issued by HMRC on 1 April 2014 to which a draft Bill was appended referred to the consultation process on the hire cap and stated that the measure "will now only apply to
drilling
rigs and accommodation vessels". The equivalent section of the draft Bill at that stage referred to "a structure that ... (b) can be used to - (i)
drill
for the purposes of searching for, or extracting, oil, or (ii) provide accommodation for individuals who work on or from a structure used in a relevant offshore area...". After further consultation (i) that which became subsection (2) was amended to capture only assets which can be used to provide accommodation for individuals who work on or from another structure (ie "offshore workers") and (ii) that which is now subsection (3) was introduced.
"But 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."
Dolphin
provided for the increase in the accommodation available on the Borgsten to enable the accommodation to meet Total's requirements and Total paid for that. See para 12 above. The provision of accommodation services was not incidental to the use of the Borgsten to provide TAD services as it was a separate service or use and was independent of the provision of the TAD services. 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. In this I wholly agree with Nugee LJ's analysis in particular in paras 44, 48 and 52 of his judgment which I have quoted in paras 24-26 above.
drilling
campaign and no need for the provision of accommodation and (ii) all the services provided by the Borgsten were to facilitate Total's
drilling
activity, founder on the same rock.
Dolphin
also argues that because almost all support vessels were expected to have some surplus accommodation which could be used to provide accommodation services to offshore workers, and the operator is likely to make use of such surplus accommodation, all or almost all TSVs will be caught by the hire cap if HMRC's interpretation is correct. The use of the Borgsten to accommodate offshore workers should rather be seen as no more than a consequence of its provision of TAD services. 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.
Dolphin
for the provision of accommodation and paid for the increase in the accommodation available on the Borgsten. Total needed the accommodation services of the Borgsten to enable it to have more than 60 personnel working on the Dunbar. That was the contractual background which the court must address when considering the application of section 356LA(3) to the facts of the case.
"The words 'merely incidental to' are upon their ordinary use apt to denote an activity (here the performance of duties) which does not serve any independent purpose but is carried out in order to further some other purpose."
He held that Captain Robson did not come within the extended exclusion in section 11(3) as his duties of flying from the Netherlands and on occasion stopping off at Heathrow or another airport in the UK before flying to an ultimate destination in America were simply coordinate duties.
Dolphin
argued that the case raised a point of law of general public importance because of the frequency of the use of the words "incidental to" in other taxing statutes. It was striking however that in the appeal hearing
Dolphin did not refer the court to such statutes in support of this contention. An examination of the CTA 2010 reveals that in some sections phrases such as "incidental purposes" or "incidental costs" are given a specific statutory definition. See, for example, sections 79, 163(6), and 207.
(7) Conclusion