Businesses can remain VAT registered during periods when they make no taxable supplies, but simply filing nil VAT returns does not necessarily establish an ongoing entitlement to VAT registration or input tax recovery. A recent First-tier Tribunal decision involving Compound Photonics Group Limited highlights why businesses relying on an intention to trade should retain clear evidence supporting that intention.
Many taxpayers remain VAT registered despite having no current taxable activities.
There can be legitimate reasons for this, including a temporary cessation of trading where the business genuinely intends to resume making taxable supplies. However, businesses should consider whether continued VAT registration remains appropriate and whether VAT deregistration requirements have been triggered.
Where a business relies on an intention to trade, being able to demonstrate that intention can be particularly important.
The recent First-tier Tribunal decision in Compound Photonics Group Limited v The Commissioners for HMRC [2026] UKFTT 00985 (TC) provides a useful example of the risks surrounding VAT recovery and economic activity.
The Compound Photonics VAT group consisted of Compound Photonics Group Limited (“CPGL”) and other group members. Its operating business was disposed of in May 2017.
CPGL subsequently sought to recover VAT on costs incurred after that disposal. Its position included arguments concerning continuing economic activity and assets that had been retained following the disposal.
The case ultimately required consideration of whether the group's economic activity had ceased following the May 2017 disposal and whether a later disposal of intellectual property constituted a separate economic activity.
One of the important practical lessons from the case concerns evidence.
HMRC challenged whether there was a sufficient connection between VAT incurred and the relevant economic activity. This placed significant importance on the evidence available to demonstrate what activities were actually being undertaken and the intentions behind them.
For businesses that have stopped making taxable supplies but intend to resume trading, contemporaneous evidence can therefore be extremely important.
An intention that is asserted only after HMRC begins asking questions will naturally be harder to substantiate than one supported by records created at the relevant time.
Depending on the circumstances, useful contemporaneous evidence could include:
The appropriate evidence will depend on the individual facts.
Businesses filing repeated nil VAT returns should periodically consider why the VAT registration is being maintained.
The important question is not simply whether a nil VAT return can be submitted. Businesses should consider whether they remain entitled or required to be VAT registered and, where input VAT is being recovered, whether the necessary connection with an economic activity can be demonstrated.
Where an intention to make taxable supplies has ceased, VAT deregistration may need to be considered.
Businesses with little or no current VATable activity should consider:
These questions are best considered before an HMRC enquiry rather than after one has started.
VAT registration, deregistration and input tax recovery can become particularly complex when a business has ceased or suspended its normal activities.
Our VAT specialists can review the circumstances, assess whether continued VAT registration and VAT recovery are appropriate, identify evidential weaknesses and advise on the potential VAT consequences of deregistration.
Speak to our VAT team or your usual LF contact about your VAT registration or input tax recovery position.
