CG17953e - Taper relief:trading company and holding company of a trading group - periods before 17 April 2002 - meaning of "purpose"

Companies will usually have wide powers to carry on activities but will often only engage in a few. Only those purposes which are reflected in the activities, or intended activities, of the company fall to be taken into account. What you must consider are the actual circumstances at a particular point in time and not the potential scope of a company's activities under powers conferred by its articles of association. Activities which the company may legally be permitted to do but which are not seriously in contemplation are to be disregarded.

Purpose can be established by looking at the taxpayer's 'object' in mind at any point in time (see, for example, Morgan v Tate and Lyle, 35TC367). Subsequent events are irrelevant except as a reflection of the taxpayer's state of mind at the time the expenditure was made. Purposes, in the case of companies, can probably only be established by looking at the intentions of the directors at a particular moment as well as looking at the transactions themselves. This is important because similar transactions by different companies (e.g. buying shares) may be for different purposes.

A company might cease being dormant and be actively preparing to trade but not actually trading. Such a company will be a trading company from the point at which it had substantially trading purposes, even if this was before it commenced to trade. However, in the case of close companies, TCGA92/SchA1/para11(3), see CG17919, would deny taper relief for periods before trading commenced, if it did in fact commence.