Squadrons + Steam VR + Windows Mixed Reality + MKB: mouse events not captured

The VR environment is not capturing my mouse. This is the case even when the application is in focus, and Win+Y is pressed so that the Desktop states that input is directed to the headset. The result is that mouse movement and clicks are not captured and because the pointer is on the Desktop, any mouse click de-focusses the game.

This therefore is a blocker to me playing the game, and I already have over 4 hrs in it trying to fix the issue.

I tested M+K controls using non-VR mode. That works fine. But I got this game to play in VR.

Please do not advise to use a controller, because that is not a fix for this issue (and Steam Controller community profiles do not work, because it emulates the mouse thus de-focussing the application).