The upcoming changes to FRS 102 apply to accounting periods beginning on or after 1 January 2026, although early adoption is permitted. Much of the focus to date has been on the accounting impact, particularly the new lease accounting model and revised revenue recognition rules.
However, privately owned businesses should also consider the tax implications. In many cases, the changes may not alter the total amount of tax paid over time, but they could affect when tax is paid, the level of deferred tax recognised and the amount of supporting analysis needed for tax compliance.
Key tax areas to consider
Group size and thresholds
Bringing more leases onto the balance sheet may increase reported assets and liabilities, while revenue recognition changes may affect turnover and profit timing. This could have knock-on consequences for size-based tax rules and reporting requirements, including transfer pricing, quarterly instalment payments and, for larger groups, Pillar 2 monitoring and Senior Accounting Officer rules.
Lease costs and capital allowances
The new lease accounting model will replace operating lease rentals in the accounts with depreciation of a right-of-use asset and interest on a lease liability. For tax purposes, businesses will need to consider how deductions should be claimed, including whether any expenditure within the lease arrangement qualifies for capital allowances. It will also be important to distinguish right-of-use asset depreciation from other fixed asset depreciation due to potential differing treatments.
Identifying non-deductible or capital items
Lease arrangements can include amounts that have differing tax treatments including in relation to timing of relief such as SDLT, capital dilapidation provisions, lease incentives or other capital costs. These may be less obvious once leases are brought onto the balance sheet, so businesses should ensure sufficient detail is retained and that this is subject to appropriate review.
Corporate Interest Restriction (CIR)
Interest on lease liabilities may now appear more prominently in the accounts. This does not necessarily mean the CIR position is straightforward, and businesses within the CIR regime should consider how lease-related finance costs are treated.
Corporation tax and quarterly instalment payments
Changes to revenue recognition and lease expense profiles could accelerate or defer taxable profits bringing some businesses into the regime for the first time which could significantly alter their cashflow profile. Businesses should assess whether payment dates or cash flow forecasts may be affected.
Deferred tax
Transition adjustments and timing differences between the accounting and tax treatment are likely to increase deferred tax considerations and complexity. The impact will vary depending on lease portfolios, contract terms and how existing arrangements are structured. Businesses may therefore need to track transition adjustments and timing differences separately.
What should businesses do now?
Businesses should start by identifying leases and customer contracts most likely to be affected, then consider the related tax impact alongside the accounting changes.
Early review should help avoid surprises, particularly where the changes affect cash tax, reporting requirements, banking covenants or the level of supporting analysis needed.
If you would like to discuss how the upcoming FRS 102 changes could affect your business, please get in touch with our team.
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