Judgment summary
This appeal concerned two HMRC decisions dated 18 February 2022: an assessment for £544,878 disallowing input tax from VAT periods 03/18 to 12/20 and 06/21 to 12/21, and disallowance of a VAT credit of £11,542 for VAT period 03/21 (1).
The Tribunal considered whether Compound Photonics Group Limited (CPGL), as representative member of a VAT group including Compound Photonics Limited (CPL) and Compound Photonics UK Limited (CPUK), ceased economic activity following the May 2017 sale of its UK operating business, and whether the later sale of retained intellectual property (IP) to Snap Inc in January 2022 constituted economic activity (2)-(12).
The Tribunal held that the Appellant carried on no actual economic activity after the May 2017 Disposal, had no objectively evidenced ongoing intention to carry on economic activity, but that the Snap Sale itself was economic activity (209).
Background
CPGL voluntarily registered for VAT on an intending trader basis from 1 January 2011, intending to develop, manufacture and sell projector technology based on gallium arsenide and liquid crystal research (8).
In June 2013 CPUK acquired a gallium arsenide fabrication plant at Newton Aycliffe (9). In May 2017, by a business sale agreement dated 3 May 2017, CPUK sold its UK operating business to a third party (the 'May 2017 Disposal'), with CPGL acting as guarantor and CPL not a party to the agreement (10), (42(1)).
Certain IP rights, defined as 'Excluded IPRs' in the sale agreement, were said to have been retained (10), (42(2)). CPUS, a US subsidiary of CPL outside the CPGL VAT group, continued operating and developing display technology in the USA (7), (11).
On 6 January 2022, the remaining operating assets of the UK Group, including IP held by CPL, were said to have been sold to Snap Inc for $101m under an asset purchase agreement dated 10 December 2021 (the 'Snap Sale') (12), (151).
Core dispute
The core issue was whether the Appellant was entitled to reclaim input tax which was the subject of HMRC's decisions, which broke down into whether the Appellant was carrying on or intending to carry on economic activity at the material times, and whether it had established a direct and immediate link between supplies made to it and taxable supplies made or to be made by it (13).
The decision addressed only the first issue, itself divided into three sub-issues: whether there was actual ongoing economic activity between the May 2017 Disposal and the Snap Sale; whether there was an ongoing intention to carry on economic activity following the May 2017 Disposal; and whether the Snap Sale itself constituted economic activity (14).
A preliminary procedural dispute also arose as to whether the 'direct and immediate link' issue had been properly pleaded in HMRC's statement of case under Rule 25(2) of the First-tier Tribunal (Tax Chamber) Rules 2009 (19)-(35).
Court findings
On the procedural issue, the Tribunal found that HMRC's statement of case, though it could have been clearer, properly put the direct and immediate link issue before the Tribunal, given the Appellant's own assertion in its grounds of appeal and HMRC's response that no evidence had been provided (26)-(32).
On actual economic activity, the Tribunal found that CPUK did not hold any material IP after the May 2017 Disposal, but CPL and CPGL held some material intangible assets in both December 2017 and December 2020, without being able to determine their exact nature beyond relating to the pre-2017 business (42). The Tribunal concluded the Appellant carried on no actual economic activity following the May 2017 Disposal, save possibly for the Snap Sale (45).
On intention, the Tribunal found the UK Group became a passive holding structure from May 2017, carrying out administrative activities relating to funding CPUS, corporate administration, and responding to an unfair prejudice petition, none of which constituted preparation for future supplies by the UK Group itself (79). The Tribunal did not accept Mr Rowley's evidence that the UK Group had an intention to receive a percentage of sales, finding it more akin to supposition than an actual intention held at the material time (79(7)).
The Tribunal held that the stated intentions were not supported by objective evidence and were, in any event, too vague and speculative to constitute economic activity, drawing on Norseman Gold Plc v HMRC [2016] UKUT 69 (TCC) and BAA Ltd v HMRC [2013] EWCA Civ 112 (111)-(135), (144).
On the Snap Sale, the Tribunal found that the UK Group had a sufficiently evidenced intention to dispose of IP by 29 October 2021 at the latest, and accepted, on the balance of probabilities, that the Snap Sale took place and that CPL received consideration, despite scant supporting documentary evidence (148)-(155). The Tribunal rejected HMRC's submission, based on the test in Wakefield College v HMRC [2018] EWCA Civ 952, that a one-off transaction could never constitute economic activity, holding that continuity relates to the concept of remuneration and recovery of prior development costs rather than requiring repeated transactions (178)-(197). The Tribunal also found, in the alternative, that the Snap Sale constituted a terminatory activity under the principle in Fini (C-32/03), and separately that it fell within section 94(5) and (6) VATA 1994 as something done in connection with the termination of a business (198)-(204).
Outcome
The Tribunal concluded that, with the exception of the Snap Sale, the Appellant did not carry on any actual economic activity following the May 2017 Disposal; the Appellant did not have any ongoing intention to carry on economic activity following that disposal; and the Snap Sale was nonetheless an instance of economic activity carrying a right to input tax deduction (209).
The question of whether any claimed input tax has a direct and immediate link to the Snap Sale remains a live issue, with the parties given liberty to apply to the Tribunal for directions if they cannot agree the correct figures (210). The Tribunal noted that the decision in FS Commercial v HMRC [2026] EWCA Civ 29 may raise procedural barriers to the Appellant establishing its right to deduct where invoices have not previously been supplied to HMRC, leaving this to further submissions (211).
Major issues / areas of contention
- Whether the Appellant carried on actual economic activity between the May 2017 Disposal and the Snap Sale.
- Whether the Appellant had an ongoing intention to carry on economic activity following the May 2017 Disposal, supported by objective evidence.
- Whether the Snap Sale itself constituted economic activity applying the test in Wakefield College v HMRC [2018] EWCA Civ 952.
- Whether the 'direct and immediate link' issue was properly pleaded in HMRC's statement of case under Rule 25(2) of the First-tier Tribunal (Tax Chamber) Rules 2009.
- The relevance of section 94(5) and (6) VATA 1994 and the principle in Fini (C-32/03) to sales connected with termination of a business.