Thank you for checking this. Turns out that my initial HID reports from the gadget to iPad had wrong size causing the issue. After fixing that it works as expected on the iPad Built-In Display. However, on the external monitor in the Extended Display mode there appears to be another issue, this time with the coordinate mapping. I have filed a feedback FB22950930.

I found out that by switching the AssistiveTouch off and back on in iPadOS settings the issue disappears. Not sure why this is required. Seems like some internal iPadOS HID gaze point state issue.