The UK Supreme Court clarified a crucial aspect of statutory interpretation, ruling that an "incidental" use must directly arise from a primary use, rather than operating independently.
Background:
Total E&P UK (Total) Ltd. operates the Dunbar oil platform in the North Sea, which requires a tender support vessel (TSV) for active drilling operations. Dolphin Drilling (Dolphin) Ltd. was contracted by Total in November 2011 to provide these tender-assisted drilling (TAD) services using the Borgsten
Dolphin (the Borgsten), a semi-submersible drilling rig leased from an associated company, Borgsten Dolphin Pte Ltd. (BDPL). The vessel was connected to the platform and provided a suite of drilling support services, including mud and cement systems, power and utilities, warehousing and workshops.
The Borgsten was not solely a drilling rig, as it also offered accommodation. Initially, the contract stipulated accommodation for its own crew and 40 Total personnel. In May 2012, this was increased to 120 people, with Total bearing the cost of this expansion. Dolphin leased the Borgsten from BDPL, paying an initial charter fee of over US$100,000 per day, deducting the full amount of those payments in its corporation tax returns for 2014 and 2015.
HMRC, however, issued closure notices disallowing part of those deductions under the ‘hire cap’ in Section 356N of the Corporation Tax Act (CTA) 2010, on the basis that the Borgsten was a relevant asset leased between connected parties. HMRC asserted that the Borgsten was indeed a "relevant asset," thereby applying the hire cap and restricting Dolphin's tax deductions. This resulted in additional corporation tax liabilities of over £4 million for 2014 and over £2.6 million for 2015.
Dolphin successfully appealed to the First-tier Tribunal (FTT), which found that the accommodation was a secondary use and not an independent purpose. The Upper Tribunal (UT) upheld that conclusion. HMRC appealed to the CoA, which reversed the decision in January 2024. Dolphin subsequently appealed to the Supreme Court.
Decision:
The Supreme Court unanimously dismissed the appeal, ruling that the hire cap under Section 356N of the CTA 2010 applies to the Borgsten Dolphin.
Lord Hodge, delivering the judgement, clarified the meaning of "incidental to another use" in Section 356LA(3) of the CTA 2010. The Court held that, for one use to be "incidental" to another, it must arise out of the primary use, rather than being an independent use. The Court reached this conclusion based on the analysis of the statute’s language and found no indication in the surrounding provisions that would alter the ordinary meaning of the phrase.
Applying this interpretation to the Borgsten, the Court determined that, while its primary use was to provide TAD services, its provision of accommodation services to offshore workers was an independent use, and not one that arose out of the TAD services. The fact that Total paid for an increase in accommodation capacity on the Borgsten further underscored that this was a separate, monetised service.
Implications:
This decision clearly interprets the phrase "incidental to another use" within Section 356LA(3) of the CTA 2010 to mean a ‘use that arises out of the primary use, rather than an independent use’. While the subject matter is tax, the Supreme Court's pronouncement on the meaning of "incidental" could have broader implications, such as the interpretation of the same phrase within a company's Articles of Association.
This case involves connected parties and the provision of services between them. While being specific to a tax provision, the principle of distinguishing between a primary service and a genuinely incidental one could apply to how different entities within a corporate group are characterised or how intra-group service agreements are structured.