VAT & Economic Activity

The First-tier Tribunal's decision in Compound Photonics Group Ltd offers a useful reminder that the end of trading is not always the end of VAT exposure.

The VAT group sold its operating business in May 2017, and the tribunal accepted that this sale marked the end of the group's original economic activity at that point. Some years later, the group sold intellectual property connected to the former business, in a transaction worth $101 million. The question for the tribunal was whether this later sale fell within the scope of VAT at all, given that the underlying business had already ceased.

The tribunal's answer turned on a distinction that runs through established UK and EU derived VAT principles: the difference between simply realising a residual asset during wind down, and actively exploiting that asset through a genuine commercial transaction. Passive disposal of what is left over from a closed business does not amount to economic activity. Active negotiation and exploitation of a valuable asset does. 

On the facts, the tribunal found the IP sale sat on the active side of that line, and treated it as a separate, one-off economic activity in its own right, independent of the business that had already ceased trading. The case reinforces that whether economic activity exists depends on the nature of each transaction, not simply on whether the taxpayer's original business is still trading.

That classification had a direct and practical consequence for input tax recovery. Because the IP sale was its own separate economic activity, VAT on costs with a direct and immediate link to that specific sale was recoverable. 

VAT on general overheads incurred during the intervening period, while the group held no trading business and had not yet sold the IP, was not recoverable. The tribunal drew a clear line between costs tied to a specific taxable transaction and costs simply incurred while a company is dormant.

Businesses planning a restructuring, wind down, or staged disposal of assets and IP should assess each transaction on its own terms rather than assuming that everything after trading ceases falls outside VAT. Getting that assessment wrong can mean VAT assumed to be recoverable is not.

If your business is planning a disposal, restructuring, or IP sale and you want clarity on how input tax recovery will be treated, VITA can help you plan the transaction with this in mind.