Tribunal dismisses HMRC’s appeal and confirms that a tender support vessel was not a ‘relevant asset’ for the purposes of the rules on the activities of oil contractors contained in Part 8ZA of the CTA 2010

In HMRC v Dolphin Drilling Ltd [2022] UKUT 00212 (TCC) The Upper Tribunal (UT) dismissed HMRC’s appeal and confirmed that a tender support vessel providing tender assisted drilling services was not not a “relevant asset” and that therefore tax deductions claimed by the company under the Oil Contractors Activities Rules contained in Part 8ZA, Corporation Tax Act 2010 (CTA 2010), were permitted.


Dolphin Drilling Ltd (DDL) has provided vessels on a bareboat charter basis to operators in the oil and gas industry. DDL chartered a vessel called the Borgsten Dolphin (the Borgsten) to perform a contract with Total E&P (UK) Ltd (Total), as part of the drilling activities on the Dunbar oil platform (the dunbar).

HMRC concluded that the deductions claimed by DDL in calculating its profits for corporation tax purposes in respect of amounts paid for the rental of the Borgsten should be limited. This was on the basis that the Borgsten was a “relevant asset” within the meaning of Part 8ZA, CTA 2010.

HMRC has issued the following closure notices to DDL:

(1) HMRC amended DDL’s tax return for the year ended 31 December 2014, increasing its chargeable profits by $21,909,895 giving rise to additional corporation tax of £3,034,129 (the amount of the modification was later increased to £4,039,309.26) and

(2) HMRC amended DDL’s tax return for the year ended 31 December 2015, increasing its taxable profits by $20,340,976 giving rise to additional corporation tax of £2,691,385.73.

DDL appealed the closure notices to the Court of First Instance (FTT) on the basis that the Borgsten was not a “relevant asset”, within the meaning of Part 8ZA.

FTT decision

The appeals were allowed.

The FTT concluded that the use of the Borgsten to provide accommodation for personnel working on the Dunbar was unlikely to be more than incidental to the use of the Borgsten to provide tender-assisted drilling services at the Dunbar .

Accordingly, the FTT concluded that the exception in Section 356LA(3), CTA 2010, applied and that the Borgsten was not a “relevant asset”.

HMRC appealed to UT on the following two grounds (having been refused leave to appeal on two other grounds by both the FTT and UT):

(1) the TTF applied an incorrect legal standard in interpreting the relevant legislation; and

(2) the FTT took the wrong approach when interpreting the contract with Total.

UT Decision

The appeals were dismissed.

(1) Incorrect legal standard in interpreting relevant legislation

HMRC’s main argument was that a use which was ‘significant’ could not be ancillary or, in the alternative, a use which was ‘essential’ could not be ancillary. Since there was no definition of “incidental” or “more than incidental” in the context of the exemption, UT was of the view that these words should have their ordinary meaning.

UT noted that, as with all legislative language, words should be interpreted purposefully and construction then applies to facts, viewed realistically. The UT concluded that the TTF did not err in law by declaring that a thing is incidental to another matter if it is subordinate or secondary to it. If a use may be desirable, sought or even important, and therefore not considered as accessory, its accessory nature depends on all the facts of the case and on the fact that this use is subordinate or secondary to another use.

The distinguished UT Robson vs. Dixon [1972] 1 WLR 1493, which concerned the meaning of “merely incidental to”, noting that this was not the same test as that contained in section 356LA(3). In UT’s view, whether one thing is incidental to another is a qualitative rather than a quantitative criterion.

The UT reviewed the approach taken by the FTT in assessing the evidence before it to determine the reasonably expected use of the Borgsten and found that the FTT was justified in approaching the matter before it as it had done so, including taking account of witness testimony and disregarding the opinion of HMRC guidance manuals (which did not relate specifically to the appeal) in reaching its careful and detailed findings of fact.

(2) Wrong approach when interpreting the contract with Total

HMRC alleged that the FTT made the following three errors of law in relation to its second ground of appeal:

(i) in determining whether the exception applied, the contract “takes precedence”, and the FTT should have limited its examination to what that contract says about the use of the Borgsten for accommodation;

(ii) in interpreting the contract, the TTF departed from the general rule that, in drawing up written contracts, the intention of the parties must be established objectively and solely from the terms of the written contract itself ; and

(iii) the FTT agreed without any evidence and concluded that the contractor would have considered the acceleration of the class renewal inquiry to be important in the context of its desire for more accommodation on the Borgsten.

UT rejected HMRC’s second ground, stating that a determination by the FTT of whether the exemption applied required a determination of the uses of the vessel and that this exercise involved a multi-factor assessment, in which the contract would have been important. In UT’s view, it was proper for the FTT to consider all relevant evidence before it, including witness testimony. UT said it was simplistic to say that it is a rule of contractual interpretation that matters outside of a written contract cannot be considered. UT viewed HMRC’s third argument as a Edwards vs. Bairstow ([1956] AC 14) argument and concluded that the high threshold required to reconsider findings of fact had not been met in this case.


Although this decision will be of particular interest to those working in the oil and gas industry, the analysis of paragraphs 63-89 of the UT decision provides useful information and guidance on the meaning of the word “accessory”, which is a term used in other fora throughout the tax system.

HMRC has sought leave to appeal UT’s decision to the Court of Appeal and assuming leave is granted it will be interesting to see if this Court disagrees with the FTT and UT.

The decision can be viewed here.

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