The Commissioners for HM Revenue and Customs v Dolphin Drilling Ltd

Hearing date: 14 December 2023

Approved Judgment

This judgment was handed down remotely at 10.30am on 11 January 2024 by circulation to the parties or their representatives by e-mail and by release to the National Archives.

Introduction

This is an appeal by the Commissioners for His Majesty's Revenue and Customs ( “HMRC”) from the Upper Tribunal (Tax and Chancery Chamber) ( “the UT”). It concerns the question whether the Respondent, Dolphin Drilling Ltd ( “Dolphin”), is subject to certain provisions in Part 8ZA of the Corporation Tax Act 2010 ( “ CTA 2010”) which are applicable to contractors in the offshore oil industry. These provisions were introduced by the Finance Act 2014 ( “FA 2014”) and apply with effect from 1 April 2014; they have the effect where they apply of imposing a “hire cap” which limits the contractor's ability to bring into account payments it makes under a lease of an asset from an associated person.

Dolphin leased an asset called the Borgsten Dolphin ( “the Borgsten”) from an associated company in Singapore called Borgsten Dolphin Pte Ltd ( “BDPL”), and in turn provided it to Total E&P UK Ltd ( “Total”), the operator of the Dunbar oil platform ( “the Dunbar”). The Borgsten had formerly been a drilling rig but was converted so as to be able to provide a number of services in connection with the preparation of the Dunbar for drilling, and then the operation of the Dunbar. Among other services, the Borgsten was used to provide sleeping accommodation for a number of those who worked on the Dunbar.

The question is whether Dolphin's payments to BDPL were (from 1 April 2014) subject to the hire cap. On the particular facts that will have been the case unless it was “reasonable to suppose” that the use of the Borgsten as accommodation for those who worked on the Dunbar “is unlikely to be more than incidental to another use, or other uses, to which [the Borgsten] is likely to be put”.

HMRC decided that this test was not met and amended Dolphin's returns accordingly. Dolphin appealed to the First-tier Tribunal ( “the FTT”), which allowed its appeal. HMRC appealed to the UT, which agreed with the FTT.

HMRC now appeal to this Court, with the permission of Lewison LJ. We have received interesting and well-argued submissions from Mr David Ewart KC, who appeared with Mr Quinlan Windle for HMRC, and from Ms Nicola Shaw KC, who appeared for Dolphin, respectively. For the reasons which follow I prefer those of Mr Ewart and would allow HMRC's appeal.

The legislation – Part 8ZA CTA 2010

I will start with the relevant legislation.Part 8ZA (ss. 356A–356NG), headed “Oil Contractors”, was inserted into the CTA 2010 by s. 73 and sch 16 paras 1 and 4 FA 2014. It is treated as having come into force on 1 April 2014.

It is divided into 4 chapters.Chapter 1 (s. 356K) provides an overview of Part 8ZA, s.356K(1) explaining that Part 8ZA is about the corporation tax treatment of “oil contractor activities”.Chapter 2 (ss. 356L to 356LD) contains relevant definitions, including a definition of “oil contractor activities” in s. 356L and a definition of “relevant asset” in s. 356LA.Chapter 3 (s. 356M) treats oil contractor activities as a separate trade.Chapter 4 (ss. 356N to 356NG) makes provision about the calculation of profits from oil contractor activities.

The hire cap is provided for by s. 356N, as follows:

“ 356N Restriction on hire etc of relevant assets to be brought into account

(1) This section applies if the contractor makes, or is to make, one or more payments under a lease of–

(a) a relevant asset, or

(b) part of a relevant asset.

(2) The total amount that may be brought into account in respect of the payments for the purposes of calculating the contractor's ring fence profits in an accounting period is limited to the hire cap.

…”

The remaining subsections contain detailed rules as to the calculation of the hire cap which it is not necessary to set out, there being no issue about the calculations in the present case.

The question whether the hire cap applies to Dolphin's payments to BDPL depends on whether the Borgsten was a “relevant asset”. If it was, then it is not disputed that Dolphin was a contractor carrying on oil contractor activities, as by s. 356L(2)(b) these include activities carried on by a company in the provision of a relevant offshore service, and by s. 356L(3) a contractor provides a relevant offshore service if the contractor provides a relevant asset in connection with the carrying on of exploration or exploitation activities in a relevant offshore area by the contractor. It is common ground that the Dunbar (which lies north-east of the Shetland Islands in the UK sector of the North Sea) is in a relevant offshore area, and that Dolphin provided the Borgsten to Total in connection with the carrying on of exploration or exploitation activities by Dolphin. So the critical question is whether the Borgsten was a relevant asset.

“Relevant asset” is defined by s. 356LA, which provides as follows:

“ 356LA “Relevant asset”

(1) In this Part “relevant asset” means an asset within subsection (2) in respect of which conditions A and B are met.

(2) An asset is within this subsection if it is a structure that–

(a) can be moved from place to place (whether or not under its own power) without major dismantling or modification, and

(b) can be used to–

(i) drill for the purposes of searching for, or extracting, oil, or

(ii) provide accommodation for individuals who work on or from another structure used in a relevant offshore area for, or in connection with, exploration or exploitation activities (“offshore workers”).

(3) But an asset is not within subsection (2)(b)(ii) if it is reasonable to suppose that its use to provide accommodation for offshore workers is unlikely to be more than incidental to another use, or other uses, to which the asset is likely to be put.

(4) In subsection (2)–

“oil” means any substance capable of being won under the authority of a licence granted under Part 1 of the Petroleum Act 1998 or the Petroleum (Production) Act (Northern Ireland) 1964;

“structure” includes a ship or other vessel.

(5) Condition A is that the asset, or any part of the asset, is leased (whether by the contractor or not) from an associated person other than the contractor.

(6) Condition B is that the asset is of the requisite value.

(7) The asset is of the “requisite value” if its market value is £2,000,000 or more.

…”

Again there is much that is common ground. It is not disputed that the Borgsten was a structure that could be moved from place to place (s. 356LA(2)(a)) and that it could be (and was) used to provide accommodation for offshore workers, that is those individuals who worked on or from the Dunbar (being another structure used in a relevant offshore area for exploration or exploitation activities) (s. 356LA(2)(b)(ii)). It is also not disputed that conditions A and B were met, as the Borgsten was leased by Dolphin from BDPL which was an associated person (s. 356LA(5)), and its market value was more than £2m (s. 356LA(6) and (7)). That means that if the Borgsten was within s. 356LA(2), it was a relevant asset; and the question whether it was within s. 356LA(2) depends on whether s. 356LA(3) applied to it. If it did, the Borgsten was not within s. 356LA(2)(b)(ii) and hence not within s. 356LA(2) at all, and so could not be a relevant asset; but unless s. 356LA(3) applied, the Borgsten was within s. 356LA(2)(b)(ii), and was a relevant asset.

So the question on this appeal is this: was it reasonable to suppose that the use of the Borgsten to provide accommodation for individuals working on the Dunbar was unlikely to be more than incidental to another use, or other uses, to which the Borgsten was likely to be put?

The facts

The facts were found in great detail by the FTT in a long and careful decision, but for present purposes they can be summarised more briefly as follows. Numbers in square brackets in this section of the judgment refer to paragraphs of the FTT's decision (at [2021] UKFTT 145 (TC)).

Total operates the Dunbar platform [27]. By 2010 the Dunbar had not drilled for a number of years, but Total intended to recommence drilling for a three year period commencing in 2012 [27]. The Dunbar is a “minimum facility drilling platform” which means that although it has a drilling derrick, it lacks significant facilities which are essential for active drilling operations [23]. To enable such a platform to perform drilling operations it needs the support of a “tender support vessel” ( “TSV”) which is designed to provide operational support services known as “tender assisted drilling” ( “TAD”) services [23]. The TSV is moored alongside the platform and connected by a gangway and an assortment of hoses; when connected the TSV and the platform effectively form an integrated unit during the drilling campaign [24].

In June 2011 Total invited Dolphin to tender for a package of services with a view to recommencing drilling in 2012 [29]. The invitation to tender explained that Total required the use of a TSV so as to become fully operational, stating that the tender vessel “supplies mud storage and pumping, cement storage and pumping, utilities...