Tribunal dismisses HMRC's appeal and confirms that a tender support vessel was not a "relevant asset" for the purposes of the oil contractor activities rules 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 a "relevant asset" and therefore the tax deductions claimed by the company under the oil contractor activities rules contained in Part 8ZA, Corporation Tax Act 2010 (CTA 2010), were allowed.

Background 

Dolphin Drilling Ltd (DDL) provided vessels by way of bareboat charter to operators in the oil and gas industry. DDL chartered a vessel called the Borgsten Dolphin (the Borgsten) to fulfil a contract with Total E&P (UK) Ltd (Total), in connection with drilling activities at the Dunbar oil platform (the Dunbar). 

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

HMRC issued the following closure notices to DDL: 

(1)  HMRC amended DDL’s tax return for the year ended 31 December 2014, increasing its taxable profits by $21,909,895, giving rise to an additional liability to corporation tax of £3,034,129 (the quantum of the amendment was subsequently 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 an additional liability to corporation tax of £2,691,385.73.

DDL appealed the closure notices to the First-tier Tribunal (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 to personnel working on the Dunbar was unlikely to be more than incidental to the use of the Borgsten to provide tender assisted drilling services to the Dunbar. 

Accordingly, the FTT found that the exception in section 356LA(3), CTA 2010, applied and the Borgsten was not a "relevant asset".

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

(1)  the FTT applied an incorrect legal test in interpreting the relevant legislation; and 

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

UT decision

The appeals were dismissed.

(1)  Incorrect legal test in interpreting the relevant legislation

HMRC's main argument was that a use which was "important" could not be incidental, or in the alternative, a use which was "essential" could not be incidental. As there was no definition of 'incidental', or 'more than incidental', in the context of the exemption, the UT was of the view that these words should carry their ordinary meaning.

The UT noted that as with any statutory language, words must be interpreted purposively and that construction then applied to the facts, viewed realistically. The UT concluded that the FTT did not make an error of law in stating that something is incidental to another matter if it is subordinate or secondary to it. Whilst a use may be desirable, sought-after or even important, and therefore not viewed as incidental, whether it is incidental depends on all of the facts in the case and whether such use is subordinate or secondary to another use. 

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

The UT reviewed the approach adopted by the FTT in assessing the evidence before it to determine the reasonably expected use of the Borgsten, and considered that the FTT was justified in approaching the question before it as it had done, including considering witness evidence and disregarding HMRC's guidance manuals (which did not relate specifically to the appeal) in making its careful and detailed findings of fact.

(2)  Incorrect approach when interpreting the contract with Total 

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

(i)  in determining whether the exception applied, the contract "has primacy", and the FTT should have confined its consideration to what that contract said about the use of the Borgsten in relation to accommodation;

(ii)  in interpreting the contract, the FTT departed from the general rule that in the construction of written contracts the intention of the parties is to be ascertained objectively and only from the words in the written contract itself; and 

(iii) the FTT accepted without any evidence, and went on to find, that the contractor would have considered acceleration of the class renewal survey to be important as part of its desire for more accommodation on the Borgsten.

The 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 exercise involved a multi-factorial assessment, in which the contract would have been important. In the UT's view, it was correct for the FTT to consider all the relevant evidence before it, including witness evidence. The UT stated that it was an over-simplification to say that it is a rule of contractual construction that matters outside a written contract cannot be taken into account. The UT considered HMRC's third argument as an Edwards v Bairstow ([1956] AC 14) argument and concluded that the high threshold required to revisit findings of fact had not been met in this case. 

Comment 

Although this decision will be of particular interest to those working in the oil and gas industry, the discussion at paragraphs 63–89 of the UT decision provides useful insight and guidance on the meaning of the word "incidental", which is a term used in other instances throughout the tax system. 

HMRC has applied for permission to appeal the UT's decision to the Court of Appeal and assuming permission is granted, it will be interesting to see whether that Court disagrees with the FTT and UT. 

The decision can be viewed here.