VAT Insights – August 2026

Can a one-off sale qualify as an economic activity? In Compound Photonics Group Ltd v HMRC [2026] UKFTT 985, HMRC argued that it cannot on the basis that an economic activity for VAT purposes requires “a supply of goods/services for consideration made for the purposes of obtaining income therefrom on a continuing basis” and a one-off transaction could not satisfy the “continuing basis” requirement. When pressed on this point by the FTT using the (unrelated) example of a sale of a single building by a property developer SPV developing that single building, HMRC confirmed that, in their view, the sale of the developed property would not qualify as an economic activity. A view which, if applied in practice, might cause considerable economic problems for the property construction industry!

Fortunately, the FTT took a robust view on this “surprising” argument which, in the words of the FTT, “raised eyebrows”. 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 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 earlier activities. The fact that the sale of the single property is intended to remunerate the earlier development activities would be sufficient to provide the necessary basis for the one-off sale to qualify as an economic activity.

In this edition, as well as looking at the FTT decision in Compound Photonics Group Ltd v HMRC, we also cover the following developments:

• changes announced for the capital goods scheme which will come into effect from 29 July
• a Court of Appeal decision that restricting exempt supplies of higher education to “eligible bodies” was in breach of fiscal neutrality.

In addition, we produce more detailed reports on the most significant tax developments so if you scroll to the bottom, there's a list of the most important issues we have covered, with links to our more detailed reports.

If you are interested in finding out more about the below or have a specific indirect tax query, please don't hesitate to get in touch.

One-off sales as economic activity

Compound Photonics Group Ltd (CPG) carried on a business of developing and commercialising research. In 2017, the UK business was sold to a third party, though certain IP rights were retained and the group continued to carry on business in the USA through its US subsidiary (CPUS). In 2022, the remaining assets of the UK group, including IP, were sold. HMRC rejected claims by CPG for input VAT in the periods between 2017 and 2022. CPG appealed and the FTT has been asked to decide the preliminary issue whether CPG had any economic activity during the relevant period.

CPG argued that it continued to have an intention to carry on an economic activity based on the possibility that it would sell products developed by CPUS if the circumstances were right and/or receive a percentage of CPUS’ sales for allowing the use of the IP if the project were successful. The decision contains useful discussion on the question whether a taxpayer has any intention to carry on an economic activity in the future. The FTT suggested that 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. “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.” CPG’s passive and speculative position was insufficient.

However, the one-off sale of the IP could qualify as an economic activity. Even though the taxpayer carried on no relevant economic activities in the period between selling the UK business and selling the IP, the group held IP as a result of economic activity conducted prior to the 2017 business 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

Read our Insights article in full

Capital goods scheme simplification

In a welcome move, the Capital Goods Schemes (CGS) rules are being simplified with effect from 29 July 2026 to remove computer equipment from the scope of the rules and increase the capital expenditure necessary in relation to land, buildings and civil engineering works to £600,000 before they are brought within the scope of the rules by the VAT (Amendment) Regulations 2026.

The CGS is a mechanism that requires businesses to adjust their initial VAT recovery on certain high-value capital assets over a set adjustment period, to reflect changes in the extent to which those assets are used for taxable (as opposed to exempt or non-business) purposes. It previously applied to land and buildings with a VAT exclusive value of £250,000 or more (adjusted over a 10-year period) and computer equipment with a value of £50,000 or more (adjusted over a 5-year period). The scheme is intended to ensure that VAT recovery over the life of a significant capital asset accurately tracks its economic use, rather than being fixed at the point of purchase.

Read our full Insights article here

Supplies of education and fiscal neutrality

The Court of Appeal in St Patrick’s International College Ltd and others v HMRC [2026] EWCA Civ 852 has held that it was bound by an earlier Court of Appeal decision that fiscal neutrality must be determined from the perspective of the customer even where a “supplier condition” applies. The case concerns supplies of higher education by suppliers who were not “eligible bodies” (such as universities or charities) and who claimed that the failure to exempt their supplies (pre-Brexit) were in breach of the principle of fiscal neutrality, since the courses they offered were indistinguishable from those offered by universities and other eligible bodies from the perspective of the typical customer. The Court of Appeal has held that this was sufficient to require their supplies to be exempted and it was not an answer that they were not bodies subject to the same regulatory regimes as “eligible bodies”.

The decision is highly significant for the private higher education sector and potentially opens the way to substantial repayment claims. However, since the decision is based on the direct effect of the underlying provisions of the VAT Directives and the principle of fiscal neutrality, its impact on the post-Brexit period may be very limited. In addition, in view of comments made in the case that there was “considerable force” in HMRC’s position on the underlying merits, it seems highly likely that HMRC may choose to appeal the issue to the Supreme Court.

See our Insights article here

Other issues we have recently covered

Tax treatment of predevelopment costs: consultation
The government has published a consultation on the extent to which capital allowances are available for predevelopment costs following the Supreme Court judgment in Orsted West of Duddon Sands (UK) Ltd. The consultation indicates that the government is not currently minded to legislate to change the tax treatment of predevelopment costs bearing in mind the expense of significantly extending reform, but is seeking to better understand where issues of uncertainty remain following the Supreme Court judgment and how any such uncertainty may affect business decisions around where and whether to invest.

Simplifying withholding tax treaty relief: consultation
The government has published a consultation on the possibility of allowing taxpayers to self-assess the availability of treaty relief for payments of interest to overseas recipients. The government notes that the current administrative rules which generally require businesses to obtain prior HMRC authorisation for payments of interest at zero or reduced treaty rates can be slow, difficult, costly and burdensome. The consultation is very much at an early stage and although self-assessment has been put forward as one option to be considered, the consultation also calls for responses on other ways in which the system might be simplified. “The intention is to identify options to meaningfully simplify the administration of the available relief, to make things simpler for taxpayers whilst maintaining robust safeguards against tax avoidance.”

Making the foreign branch exemption compulsory
In May 2026, the government announced that UK resident companies with a foreign permanent establishment (PE) would be required to exempt the profits and losses from those PEs. The change is designed to prevent losses attributable to such foreign PEs being utilised in the UK whilst foreign profits are not similarly taxed. The government has now published draft legislation for implementing reforms to the UK foreign branch exemption to effectively make it compulsory with effect for accounting periods beginning on or after 1 January 2027. The draft legislation also includes targeted anti-avoidance and anti-forestalling rules.

Taxation of cryptoassets: L-day developments
On 13 July 2026, HMRC published draft legislation for the 2026/2027 Finance Bill together with a number of supporting documents and consultations. A number of these will impact the taxation of cryptoassets, cryptoasset investors and those who support the cryptoasset industry. In particular, the government has published proposals for the reform of the tax treatment of stablecoins and cryptoasset lending and liquidity pools, whilst also extending HMRC’s tax information powers in relation to digital assets and data.

OECD TP guidance on intra-group services: Simmons response
Simmons & Simmons has responded to the OECD draft update to Chapter VII of the OECD Transfer Pricing Guidelines, proposing a range of revisions and clarifications in relation to intra-group services.