Key Facts
- •Dolphin Drilling Ltd (Dolphin) leased the Borgsten Dolphin (Borgsten) from an associated company, Borgsten Dolphin Pte Ltd (BDPL), to provide services to Total E&P UK Ltd (Total).
- •The Borgsten, a converted drilling rig, provided tender assisted drilling (TAD) services and accommodation for personnel working on the Dunbar oil platform.
- •HMRC argued that Dolphin's payments to BDPL were subject to a 'hire cap' under Part 8ZA of the Corporation Tax Act 2010 (CTA 2010), introduced by the Finance Act 2014 (FA 2014).
- •The key legal question was whether the Borgsten's use for accommodation was 'incidental' to its other uses under s. 356LA(3) CTA 2010.
- •The First-tier Tribunal (FTT) and Upper Tribunal (UT) both ruled in favor of Dolphin, finding the accommodation use to be incidental.
- •HMRC appealed to the Court of Appeal.
Legal Principles
Interpretation of the term 'incidental' in s. 356LA(3) CTA 2010.
Corporation Tax Act 2010, s. 356LA(3)
The meaning of 'incidental' is to be derived from its ordinary English meaning, considering how it is used in everyday contexts.
Robson v Dixon [1972] 1 WLR 1493
A use is incidental to another only if it arises from, is connected with, or is a byproduct of that other use, not if it serves an independent and significant purpose.
Court of Appeal judgment
The statutory test under s. 356LA(3) requires assessing at the outset of the accounting period whether it is reasonable to suppose one use is unlikely to be more than incidental to another.
Court of Appeal judgment
Outcomes
The Court of Appeal allowed HMRC's appeal.
The FTT and UT misdirected themselves by focusing on whether the accommodation use was subordinate or secondary to other uses, rather than whether it was an independent and significant use unconnected with the other uses. The Court held that the use of the Borgsten for accommodation was a significant and independent use, not incidental to its use for TAD services. Therefore, the hire cap applied.