There are significant changes to FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland” for accounting periods commencing on or after 1 January 2026, as UK GAAP moves closer to international accounting standards. Key updates to FRS 102 include:
- a new five-step revenue recognition model aligned with IFRS 15 Revenue from Contracts with Customers; and
- a revised lease accounting model requiring lessees to recognise most operating leases on the balance sheet, consistent with IFRS 16 Leases.
The Periodic Review 2024 amendments include many other changes impacting almost every section of FRS 102, which are explained in the article Periodic Review 2024: the changes beyond revenue and leases.
While businesses will naturally focus on the balance sheet and profit and loss impacts, the corporation tax implications will also require careful consideration to ensure compliance and to optimise tax positions.
This article focuses on the corporation tax implications arising from the revenue and lease accounting changes.
Implications of revenue recognition changes
The new five-step revenue recognition model under FRS 102 is aligned with IFRS 15 and is particularly relevant for entities that provide bundled goods/services, warranties or charge non-refundable upfront fees.
These changes may give rise to transitional adjustments, altering the timing of revenue recognised in the profit and loss account. This may involve prior period restatements or adjustments to opening reserves on initial application of the new standard.
The starting point for calculating taxable profits for corporation tax purposes is the profit or loss before tax in the accounts. Therefore, any change in the timing of revenue receipts for accounting purposes is likely to have a knock-on effect on the tax position.
In addition, where transitional adjustments arise, the corporation tax rules generally require the net transition amount to be brought into account for tax in the first accounting period in which the new standard applies. Care must be taken to ensure that income is taxed only once and that tax relief for expenditure is similarly obtained only once. The detailed computational rules are set out in Chapter 14, Part 3, of CTA 2009, with further guidance available in HMRC’s Business Income Manual at BIM34000.
Transitional adjustments could result in a significant increase or decrease in taxable profits. Where taxable profits increase, companies may be required to pay their corporation tax by Quarterly Instalment Payments (QIPs) for the first time. If the very large company QIPs thresholds are breached, payments could be accelerated further. In such cases, corporation tax payments could fall due as early as 14 March 2026 (unless the company is an early adopter, where this can be earlier still), making it vital to understand and map out the impact early to avoid cash flow pressures and late payment or underpayment interest charges arising.
In addition, increased taxable profits arising from transitional adjustments may cause companies to exceed the £5m annual deductions allowance for carried-forward losses. Where this threshold is exceeded, the use of losses is restricted to 50% of profits above the allowance. As a result, a corporation tax liability may arise that would not have been expected under the previous accounting treatment.
Implications of lease accounting changes
The revised lease accounting model requires lessees to recognise operating leases on the balance sheet, consistent with IFRS 16. In fact, the distinction between a finance and an operating lease has been removed under the new FRS 102, and lessees now need to recognise most leases on the balance sheet as right-of-use (RoU) assets with a corresponding lease liability. Recognition exemptions are available for certain leases of low-value assets and short-term leases.
The depreciation of the RoU asset and the interest expense on the lease liability will be expensed to the profit and loss account.
On initial adoption, spreading rules will ensure, for tax purposes, that the one-off profit or loss arising from a lessee’s transitional adjustment does not crystallise immediately. Instead, any taxable adjustment recognised in opening reserves on adoption will be brought into account gradually over a spreading period. The spreading period is broadly based on the weighted average remaining lease term of the leases that have given rise to the adjustments.
Where spreading applies, consideration should be made to deferred tax. Timing differences may arise between the recognition of the transitional adjustments for accounting purposes and when the income or expenditure is brought into account for tax purposes.
The way in which tax relief may be available for RoU assets will need to be considered on an asset-by-asset basis. In some cases, it may be that the depreciation and the interest expense charged to the profit and loss account will be deductible for corporation tax. In other cases, such as where the lessee was already treating the contract as a finance lease in accordance with UK GAAP and it was therefore potentially eligible for capital allowances, the existing treatment will continue to apply. Ultimately, the underlying tax rules have not changed and therefore they will be applied to each asset, taking into account the relevant factors.
Care must also be taken when the RoU asset includes direct costs which are capital in nature. Notable examples include lease premiums, stamp and land taxes, property fit-out costs, payments to a previous tenant to obtain the lease and estimated dilapidations/restoration costs. These elements will need to be stripped out and considered separately for tax relief.
Other tax considerations
Corporate Interest Restriction and right-of-use assets
The Corporate Interest Restriction (CIR) rules can restrict the amount of ‘net-tax interest expense’ that is deductible in UK companies for corporation tax purposes.
The recognition of lease liabilities under the revised FRS 102 will typically increase the interest expense in the accounts. However, where a RoU asset would previously have been classified as an operating lease under the previous edition of FRS 102 (January 2022), there should be no impact on the CIR position.
While there should be no additional CIR disallowance, the legislation requires an implicit classification test to determine if leases would have been a finance or operating lease under the previous edition of FRS 102. Therefore, there are likely to be additional considerations and record keeping requirements for certain companies and groups.
Impact on gross assets and turnover
Gross assets and turnover are key measures used for a wide range of tax regimes and thresholds, including the audit exemption limits, Senior Accounting Officer regime, country-by-country reporting, pillar two and tax investment reliefs such as the Enterprise Investment Scheme and Seed Enterprise Investment Scheme, among others.
FRS 102 transitional adjustments can significantly affect both the balance sheet totals and the profit and loss account, in some cases impacting both the turnover and gross asset figures. These changes may therefore impact eligibility for reliefs or compliance obligations, even when there has been no change in underlying commercial activity.
Next steps
As with any changes to accounting standards, it is crucial to consider the corporation tax implications alongside the accounting impact. Changes to recognition and measurement may affect the timing of taxable profits and deferred tax balances, making early assessment of transitional adjustments essential to ensure that any additional compliance requirements are addressed in a timely manner, and to avoid missed deadlines, cashflow issues, penalties or late payment interest.
