Court of Appeal Analyzes “Incidental” Use in Offshore Oil Industry Hire Cap Case

Citation: [2024] EWCA Civ 1
Judgment on

Introduction

In the case of The Commissioners for HMRC v Dolphin Drilling Ltd, the Court of Appeal (Civil Division) analyzed provisions in Part 8ZA of the Corporation Tax Act 2010 (CTA 2010) concerning the introduction of a “hire cap” for contractors in the offshore oil industry. The contentious issue was whether the limitations on deductible payments under a lease, known as the “hire cap,” were applicable to the respondent, Dolphin Drilling Ltd (“Dolphin”), who provided accommodation services in conjunction with tender assisted drilling (TAD) services. The judgment scrutinized the interpretation of “incidental” within the legislation and the applicable legal principles for determining whether the accommodation service was more than incidental to the asset’s other uses.

Key Facts

Dolphin Drilling Ltd leased an asset named the Borgsten from an associated company for providing various services, including accommodation for workers at the Dunbar oil platform. The Commissioners for HMRC (Appellants) amended Dolphin’s tax returns, imposing a hire cap pursuant to Part 8ZA CTA 2010, on the premise that the payments for the lease were beyond the allowable limit for tax deductions. Dolphin contended that their use of the Borgsten for accommodation was indeed incidental to other uses, notably the provision of TAD services.

The First-tier Tribunal (FTT) initially found in favor of Dolphin, and this was upheld by the Upper Tribunal. The Commissioners for HMRC subsequently appealed.

The following key legal principles were distilled from the judgment:

  1. Meaning of ‘Incidental’: The Court of Appeal emphasized the ordinary meaning of ‘incidental’, referencing the decision in Robson v Dixon [1972] 1 WLR 1493, which interpreted ‘incidental’ as an activity that does not serve an independent purpose but furthers another purpose or is tied to it, or as a by-product of it.

  2. Standard of Review: The Court focused on the original rationale of the FTT, reiterating the principle that in appeals of this nature, the primary scrutiny is whether the FTT’s decision was legally correct. Misdirection by the FTT would indeed be grounds for an appeal.

  3. Statutory Interpretation of Part 8ZA CTA 2010: The Court dissected the nuances in Section 356LA(3) CTA 2010, which delineated that an asset is not a “relevant asset” (and thus subject to the hire cap) if it is reasonable to suppose that its use for accommodation is unlikely to be more than incidental to another use. This approach underscored the importance of contextual statutory interpretation.

  4. Multifactorial Evaluative Judgment: The Court remarked that determining whether a use is ‘incidental’ involves a multifactorial qualitative evaluation of relationships between different uses, not a simple quantitative or comparative analysis of importance or significance.

Outcomes

The Court of Appeal concluded that the FTT had erred by not appropriately applying the definition of ‘incidental’. It stated that the use of the Borgsten to provide accommodation could not reasonably be considered incidental to the provision of TAD services or to the accommodation of Dolphin personnel. The Borgsten’s use as accommodation was an independent purpose essential to the operations on the Dunbar. Therefore, the appeals were allowed, and the hire cap imposed by the HMRC was upheld for the relevant accounting periods.

Conclusion

The Court’s decision in The Commissioners for HMRC v Dolphin Drilling Ltd elucidates the legal interpretation of the word ‘incidental’ within the context of the Corporation Tax Act 2010 and clarifies the application of hire cap provisions to contractors in the offshore oil industry. The Court’s analysis underlines the importance of understanding the interplay between different uses of an asset in assessing tax liabilities. The judgment serves as a reminder for legal professionals to give due consideration to the legislative context and the ordinary usage of language when interpreting statutory provisions.