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Changes to UK financial reporting standards in 2026 will have corporation tax implications. What are they?
15 April 2025
In their latest update The Financial Reporting Council (FRC) released some notable changes to the Financial Reporting Standards (FRS) for use in the UK and Ireland. This included changes to FRS 102, the most commonly used of the standards, which will align it more closely to the international accounting standards (IFRS), although some differences will remain.
Most of the changes are effective for accounting periods beginning on or after 1 January 2026. So, there is some time to prepare for them, but it is important to start considering the implications now.
Fergus Rhodes considers these implications.
The new standards can be adopted early. However, as this is on an ‘all-or-nothing’ basis, there is no picking and choosing the parts of the new standard you might like in 2025 and leaving the less desirable changes for later.
The two areas of accounting that will fundamentally change for accounting periods starting on or after 1 January 2026 are leases and revenue recognition.
Most leases will now be held on balance sheet, with the exception of short leases (less than 12 months) and low value leases.
Leases that were previously classified as operating leases, with the annual rental charge being accounted for through the income statement, will now be accounted for on the balance sheet by recognising a ‘right-of-use asset’, and the future lease payments as the lease liability.
This is in line with how international accounting standards treat leases (IFRS 16).
Under the previous reporting standards, payments were accounted for in the income statement, and were an allowable cost for tax. However, the updates will mean that the payments made will be accounted for against a lease liability on the balance sheet. This ‘right of use asset’ will be depreciated over the term of the lease, and the depreciation will be an allowable expense for corporation tax purposes.
As well as the depreciation of the ‘right of use’ asset, notional interest and lease premium adjustments may need to be included in the income statement. These could impact Corporate Interest Restriction (CIR) and overall depreciation deductibility.
It is also important to note that by recognising these right-of-use assets, the gross assets of your business will increase, which may impact your eligibility for certain reliefs and tax efficient investments.
The update is likely to affect many businesses as it requires revenue to be recognised in line with a five-step recognition model.
These five steps consider whether performance obligations have been satisfied rather than the transfer of risks and rewards from revenue transactions, as current UK GAAP requires. This is how international accounting standards treat revenue (IFRS 15).
Some businesses will face minimal or no changes, but for others it will have a very significant impact on when revenue is recognised. As a result of this you may find that revenue is recognised sooner or later than previously, impacting profits and thus tax liabilities.
As you may see an increase or decrease in your tax liability, it will be important to plan this into your cashflow planning and, for those in the Quarterly Instalment Payments (QIPs) regime you may need to plan well in advance for this cash impact.
Additionally, if revenue and therefore profits are brought forward, you may find this tips your company over the threshold for QIPs or Very Large QIPs.
Companies should start preparing for the wider business impacts of these changes.
The best way to do this is to undertake an impact assessment on your revenue and lease accounting to help quantify the impact of these changes. This is something we can assist with if needed.
From here we can help you consider whether your business has taken all appropriate steps to mitigate against any unintended consequences of the changes in accounting standards. As discussed above, this may entail bringing forward SEIS or EIS plans, updating QIPs calculations or putting in place systems to ensure compliance with the new requirements.
Please do not underestimate the time it will take to ensure that systems are in place to reliably track depreciation on leased assets and non-leased assets separately, so that the correct tax treatment can be applied.
For more support on this topic please reach out to your local Bishop Fleming team or email us with your enquiry.
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