The Supreme Court clarified the statutory interpretation of “incidental to” under section 356LA(3) of the Corporation Tax Act 2010, holding that accommodation services constituted an independent use rather than being merely incidental to tender assisted drilling operations. The decision establishes that for one use to be incidental to another, it must arise out of or be carried out to further the primary use, not simply be secondary or subordinate in importance.

Background

Dolphin Drilling operated the Borgsten vessel under bareboat charter arrangements, providing tender assisted drilling (TAD) services to Total’s Dunbar platform in the North Sea. The vessel simultaneously accommodated offshore workers employed by Total. HMRC applied hire cap restrictions under Part 8ZA of the CTA 2010, contending that the accommodation use exceeded the statutory threshold for being “incidental to” the primary drilling support function. The legislation targets bareboat charters between connected parties to prevent profit-shifting from UK corporation tax. The critical interpretative question concerned whether accommodation provision was “unlikely to be more than incidental to another use” within section 356LA(3).

Judgment

Lord Hodge, delivering the unanimous judgment, adopted a purposive interpretative approach whilst emphasising the primacy of statutory language. The Court rejected Dolphin’s argument that accommodation was merely consequential to TAD services. Significantly, the judgment distinguished between uses that are subordinate or secondary versus those that are truly incidental. The Court held that “incidental to” requires use A to arise out of, be done because of, or serve to further use B. “Accommodation services” were a distinct contractual obligation with separate commercial significance, evidenced by Total’s specific procurement and payment for enhanced accommodation capacity. The Court dismissed arguments based on causal connection, holding that the “but for” test was inappropriate – the relevant inquiry was whether accommodation use arose from drilling support services, not whether it would have existed absent the primary contract.

Endnote

This UKSC decision provides guidance on tax avoidance legislation targeting offshore operations whilst establishing broader interpretative principles for “incidental” provisions across the tax code. The judgment’s emphasis on functional independence over hierarchical relationships is likely to influence commercial structuring in the oil and gas sector. The Court’s approach suggests that genuine dual-purpose arrangements cannot escape statutory restrictions merely by demonstrating operational integration or causative relationships.

Read the full judgment of the UK Supreme Court: Commissioners for His Majesty’s Revenue and Customs v Dolphin Drilling Ltd [2025] UKSC 24