VAT, economic activity and one-off sales

The FTT has held that a one-off sale of IP several years following the end of UK business activities amounted to an economic activity for VAT purposes, even though the taxpayer carried on no relevant economic activities in the intervening period: Compound Photonics Group Ltd v HMRC [2026] UKFTT 985. As such, input VAT incurred by the taxpayer could, in principle, be recovered if it could be shown to have a direct and immediate link with that economic activity.

The FTT rejected HMRC’s surprising argument in this case that a one-off sale could not amount to economic activity, with HMRC going so far as to say, by way of example, that the sale of a property by a property developer SPV could not amount to an economic activity for this reason. Fortunately, the FTT had little sympathy for this argument and has provided some welcome guidance on the meaning of economic activity in the context of single, one-off transactions.

Background

Compound Photonics Group Ltd (CPG) was the VAT representative member of a UK group of companies which, prior to 2017, carried on a business of developing and commercialising research into gallium arsenide and liquid crystal technology. In 2017, the UK business was sold to a third party, though certain IP rights were retained. In addition, the group continued to carry on business in the USA through its US subsidiary. In 2022, the remaining assets of the UK group, including IP, were sold.

CPG sought to reclaim input VAT in the periods between 2017 and 2022. HMRC rejected these claims on the basis that CPG did not carry on any economic activity during this period and even if it did, any input VAT did not have a direct and immediate link to any such activities. CPG sought to appeal that decision and the FTT has been asked to provide a decision on the preliminary issue as to whether CPG had any economic activity during the relevant period.

FTT decision

CPG argued that its economic activities during the relevant period consisted of: (a) ongoing economic activities related to the R&D and development; (b) an intention to carry on future economic activities in the UK once development in the US allowed; and (c) the sale of the IP in 2022.

Noting that the burden to show that there was either continuing economic activity or an intention to carry on a future economic activity was on CPG, the FTT had little difficulty in dismissing these arguments. There was no evidence of any continuing business in the UK after the 2017 sale and there was no evidence of an intention to carry on a future business in the UK. In particular, the FTT noted that the activities of CPG in the UK after 2017 simply related to obtaining funding for the US activities and administration of the corporate entities in the group. None of the activities took the form of preparations to make future supplies by the UK group. After 2017, CPG was a passive holding company. Moreover, the declared intention of CPG for the UK group to sell products developed by CPUS if the circumstances were right and/or receive a percentage of sales for allowing the continuing use of the IP if the project were successful, did not meet the required conditions for an intention to carry on a business. Whilst some form of uncertainty or contingency is not fatal to the existence of an intention to carry on a business, it is not the case that any intention, no matter how speculative, can suffice. In particular, the notion that “something will turn up” is insufficient. In this case, CPG undertook no development activity and was wholly dependent on the US activities and the stated intention amounted to no more than a “vague hope”. “An intending trader must take control of its own destiny and show that it is doing something to support its intention to carry on economic activity, beyond simply holding assets.”

Was the 2022 sale of the IP an economic activity? Here HMRC argued that, based on the Wakefield College test, there must be a supply of goods/services for consideration made for the purposes of obtaining income therefrom on a continuing basis. Therefore, this meant that a one-off transaction could not give rise to an economic activity. As the FTT noted, “the suggestion that a single transaction could never amount to economic activity seemed to us to be rather surprising…
We put to Ms Inglis a number of hypothetical scenarios in order to seek such clarification. In particular, we suggested that a property development carried out through a special purpose vehicle company would almost always culminate in a single sale of the completed building. Was HMRC’s position that such property developments would fall outside the scope of UK VAT on the basis that the single ultimate sale was not economic activity? Ms Inglis’ response to our enquiries was that yes, HMRC’s position is that a sale by an SPV property developer, developing a single building, of that single building, would not be economic activity for VAT purposes. This resulted in raised eyebrows during the hearing.”

Unsurprisingly, the FTT concluded that “it is rather too reductive to equate income on a continuing basis with a requirement for multiple output transactions. The FTT noted that the concept of “remuneration” has often been used in the case law as an alternative to the need for “a continuous basis” and the concept of remuneration implies that the activities are intended to be funded by the consideration earned. In the case of one-off transactions, there is a need to have regard any earlier activities. So with the example of the sale of a development property, the FTT pointed out that there are many years of activity where funds are expended and work carried on in the anticipation of a final payday. The continuity (and therefore remuneration) is to be found in that ongoing work to
earn the final consideration. The fact that there will often be a single output sale does not alter the position.

Equally, in this case, the remunerative element, and the continuity, arises from the previously carried-on activity. The UK group held IP as a result of activity conducted prior to the 2017 disposal and the 2022 sale was for remuneration because it was to recover the costs of developing that IP.

Alternatively, the disposal of assets created or acquired as part of an economic activity ought to be treated as part of that activity and the sale is an economic activity as it is in essence part of the previous business.

The question of whether any of the costs on which input VAT had been incurred might have a direct and immediate link to the sale of the IP in 2022 was a matter that had not been argued before the FTT and was left to the parties to agree.

Comment

HMRC’s argument that a one-off transaction cannot amount to an economic activity, no matter the circumstances, seems to be part of a trend of seeking to support arguments in a particular case no matter that they run entirely counter to HMRC’s known policy (see also the recent Barclays Service Corporation case as another recent example). The suggestion, in particular, that the sale of a property by a property developer using an SPV to acquire, develop and sell a property is certainly worth the “raised eyebrow” of the FTT. It is entirely contrary to HMRC’s guidance and known policy that property development is an economic activity and entirely ignores the fact that the sale is clearly part of that activity. In this case, the underlying economic activity had ended several years earlier, but the FTT was content that the later sale of the IP still amounted to a taxable activity linked to the earlier underlying business.