Aberdeen offshore company lose appeal against application of hire cap rules to provision of drilling support vessel

About this case:

• Citation:
  [2025] UKSC 24
• Judgment:
  External link
• Court:
  UK Supreme Court
• Judge:
  Lord Hodge

Dolphin Drilling Ltd was issued a closure notice by HMRC in January 2018 stating that it was due to pay just over £4 million in further corporation tax for the two accounting periods after the tax authority took the view that it could not take charter fees paid to a Singapore-based associated company into account in calculating its profits. Following Dolphin’s successful challenge in the First-tier Tribunal, HMRC appealed to the Upper Tribunal and then the Court of Appeal, with the latter ruling in its favour.

The appeal was heard by Lord Hodge, Lord Burrows, Lady Rose, Lord Richards, and Lady Simler. Nicola Shaw KC and Harry Winter appeared for the appellant and David Ewart KC and Quinlan Windle appeared for the respondent. The sole opinion was delivered by Lord Hodge.

Independent end

From 1 April 2014, a hire cap on contractors operating in the UK territorial sea or the Continental Shelf was imposed under section 8ZA of the Corporation Tax Act 2010, inserted by the Finance Act 2014. The hire cap restricted the deduction of payments under leases between connected parties in respect of any “relevant asset” in computing the profits of the paying contractor from its “oil contractor activities”. The term “relevant asset” included a structure which can be moved from place to place and could be used to provide accommodation for offshore workers, but excepted assets which would be unlikely if its residential use was unlikely to be more than incidental to another use.

Section 8ZA came about as a result of the UK government’s concerns that the oil and gas industry was using barebones charter boats to move more significant taxable profit outside of the UK tax net. The leasing payments made by operators to associated companies outside of the UK would then be deducted from the profits which were liable to UK corporation tax.

In 2012, Total E&P UK Ltd intended to recommence drilling at the Dunbar oil platform in the North Sea. It invited Dolphin to tender for the provision of a Tender Support Vessel, which could effectively form an integrated drilling unit with the platform when connected. The vessel Dolphin intended to use, the Borgsten, also had the capacity to accommodate 102 people, with an expectation that 55 berths would be in regular use. The Borgsten was leased from a company associated with Dolphin registered in Singapore, BDPL, with a charter fee of US $100,000 per day.

The First-tier Tribunal agreed with Dolphin’s submission that the use of the Borgsten for accommodation was unlikely to have been more than incidental to its other uses, and thus it was excepted from the hire cap rules. However, the Court of Appeal took the view that use could not be “incidental” if it could be an independent end in itself. While the Borgsten’s use as an accommodation vessel was secondary, it was not for that reason alone incidental to its other uses.

For the appellant it was submitted that the legislation was aimed at “flotel” type vessels, while HMRC’s interpretation would catch almost all support vessels as they could be expected to carry surplus accommodation. In any case, if the Court of Appeal’s interpretation of the statute was correct, the hire of the Borgsten fell outside the scope of section 356LA(3) because the vessel would not be used at all but for its use to provide assisted drilling services.

Needed accommodation services

Lord Hodge, with whom the other judges agreed, said of the key definitions: “The words “it is ‘reasonable to suppose that its use’ and the references to likelihood set up an objective test looking to the future at the start of an accounting period against the backdrop of what the parties have contracted for. It is also clear that the use to provide accommodation for offshore workers is to be assessed against another use or uses to which the structure is put. The critical question is the meaning of ‘incidental to’ in the phrase as a whole: ‘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’.”

He continued: “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.”

Considering the argument that this interpretation would catch almost all support vessels, Lord Hodge said: “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.”

He concluded: “There is nothing in this argument. Total contracted with 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 court accordingly dismissed Dolphin’s appeal.