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HMRC internal manual

Business Leasing Manual

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HM Revenue & Customs
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Defining long funding leases: miscellaneous definitions: inception and commencement (CAA01/S70YI)

The legislation distinguishes between ‘inception’ and ‘commencement’ in a similar way to IAS 17 and FRS102 Section 20. The definitions are in CAA01/S70YI.

The inception of a lease is the earliest date when

  • there is a contract in writing for the lease between the lessor and lessee,
  • the contract is unconditional or, if it is conditional, the conditions have been met, and
  • no terms remain to be agreed.

A contract is unconditional if there are no events that must occur or conditions to be satisfied before the parties become bound by the contract. When all the events occur or the conditions are satisfied the contract becomes unconditional at that point.

The definition of inception is similar to the definition in IAS 17 and FRS102 Section 20 (BLM11030). Note, however, that where a business follows SSAP 21 the definition of inception for accounting purposes is closer to the concept of commencement in IAS 17, FRS102 Section 20 and CAA01/S70YI.

CAA01/S70YI defines ‘commencement’ as

“the date on and after which the lessee is entitled to use the complete leased asset under the lease; for this purpose an asset is to be regarded as complete if its construction is substantially complete.”

The use of the term ‘substantially complete’ means that relatively minor works that may be needed following the date when the lessee is entitled to use the asset do not delay the date of commencement of the lease term.

A lessee may be entitled to ‘use’ an asset even if it only used for trials etc, as well as use for its final intended purpose.