The Supreme Court in Dolphin Drilling dismissed the taxpayer’s appeal, agreeing with the Court of Appeal that the provision of accommodation for offshore workers was an independent end in itself and not (as the First-tier Tribunal and Upper Tribunal had held) “incidental” to the drilling services provided by the vessel leased by Dolphin Drilling. This meant that the hire cap under the oil contractor regime in Part 8ZA of the Corporation Tax Act 2010, which limits deductions for payments under leases of drilling rigs and accommodation vessels between connected persons, applied and Dolphin owed around £6.7m in additional corporation tax.

The facts of this case are quite niche, so how did this case go all the way to the Supreme Court?

When they applied for permission to appeal to the Supreme Court, Dolphin argued that the case raised a point of law of general public importance because of the frequency of use of the words “incidental to” in other taxing statutes. 

As this case progressed through the courts, and in particular when the Court of Appeal used the term “by-product” to refer to an incidental use, I had wondered about the broader implications of the case.  

Would the discussion of the meaning of “incidental” be picked up in other tax contexts, including in the application of the purpose test in a double tax treaty, or whether a purpose is a "main purpose" under the unallowable purpose test in the loan relationship rules (section 441 of the Corporation Tax Act 2009)? 

The Supreme Court, however, emphasised that the decision is based on the facts of this case and the specific statutory context. 

Lord Hodge commented that, in the hearing, Dolphin had not referred the court to other similar statutory references and that, in any event, it would not be appropriate to make any rulings on the meaning of the phrase “incidental to” or “incidental” in statutory contexts other than the context of the hire cap provision under consideration in the case. 

The Supreme Court agreed with the Court of Appeal that the words “incidental to another use” should be given their ordinary meaning. On the facts of this case, there was a primary use of providing drilling services and a secondary use of providing accommodation services. 

Although the taxpayer argued that, but for the other services, the accommodation would not have been provided, the Supreme Court said this was not the test. The correct test was whether the provision of accommodation was a separate service or use independent of the provision of the drilling services. On this basis, a use of an asset (Use A), which is important or even essential, can be secondary or subordinate to another use (Use B), but if Use A does not “arise out of use B” it is an independent use and not incidental to Use B. There is still an element of quantitative analysis involved, however, as Lord Hodge accepted that there may be circumstances where the use of accommodation on a tender support vessel which is trivial or casual “may not be more than incidental to the provision of other services”. This was not the case here, however, because extensive and additional accommodation was provided on the vessel for which extra consideration had been paid.