Understanding the Tax Implications of FRS 102 Changes

From 1 January 2026, some important updates to FRS 102 come into effect. This is the accounting standard most UK companies use, and the upcoming changes – especially around how leases are shown in your accounts – will also impact how much Corporation Tax you pay, and crucially, when you pay it.

As we move closer to the transition date, it’s worth speaking to a tax advisor early. Understanding what’s changing and what it means for your business will help you plan ahead with confidence.

FRS 102 sets out the accounting rules that guide how most UK businesses prepare their financial statements. Your Corporation Tax calculation starts with the profit shown in your accounts – so when accounting rules change, your tax position often shifts with them.

Right now, leases fall into two buckets:

• Finance leases – shown on the balance sheet, with tax relief given on depreciation and interest (even though depreciation isn’t normally deductible).
• Operating leases – kept off the balance sheet, with tax relief given on the rent paid.

From 2026, this distinction disappears for most leases. Under the new FRS 102 rules, nearly all leases will move onto the balance sheet. Businesses will recognise a “right-of-use” asset and a matching lease liability. Each year, you’ll record depreciation on the asset and interest on the liability – both tax-deductible, much like finance leases currently.

• Timing of deductions: Interest under the new model is higher at the start of a lease and decreases over time. That means you may see more tax relief upfront and less later on. The total tax relief doesn’t change — just the timing. This timing difference could push some companies into HMRC’s ‘large’ or ‘very large’ categories, which may trigger quarterly instalment payments. For many businesses, that shift can have a meaningful impact on cash flow.
• Transitional adjustments: Switching to the new rules may create a one-off adjustment in your accounts. For tax purposes, this won’t hit in one go. It will be spread over the average remaining length of your leases, helping smooth out any major jumps in taxable profits.
• Deferred tax: Because deductions happen at different times under the new model, you may see more deferred tax assets or liabilities. This is simply an accounting way of showing tax that will be paid or saved in the future.

• Interest calculations: More interest in your accounts could affect how much is deductible under Corporate Interest Restriction rules. Adjustments are in place to stop businesses being penalised just because of the accounting change.
• Gross assets: Bringing leases onto the balance sheet increases reported assets. HMRC uses this figure in size tests for SMEs, which could affect eligibility for reliefs or exemptions like EIS, transfer pricing rules, or EMI share options.

A few practical steps to get ahead:

• Review your lease portfolio – Understand which leases will be affected and how the new rules will change your accounts and tax profile.
• Plan for transitional adjustments – Make sure you know what the one-off adjustment will look like and how it will spread over future tax periods.
• Check eligibility for reliefs – If your balance sheet will grow, review whether any tax reliefs or exemptions could be affected.
• Speak to your advisor early – These are technical changes, but the real-world impact – especially on cash flow – can be significant. Early planning helps avoid surprises.

The upcoming changes to FRS 102 are more than an accounting shift – they influence how and when you pay Corporation Tax. By getting to grips with the changes now, you can prepare confidently and make informed decisions for your business. If you’d like to explore what these updates might mean for you, our Audit Business Champions are here to help.