FRS 102 amendments 2026 and corporation tax implications for businesses

On 27 March 2024, the FRC issued amendments to FRS 102 following the conclusion of its second periodic review (“FRS 102 amendments”). The FRS 102 amendments result in greater alignment with UK International Financial Reporting Standards (UK IFRS).

The principal effective date for these amendments is accounting periods beginning on or after 1 January 2026, with early application permitted provided all amendments are applied at the same time.

The main focus of businesses is likely to be the impact that these amendments will have on the balance sheet and profit and loss account, but there are corporation tax implications that will also need to be carefully considered to ensure compliance and to optimise tax positions.

The key changes considered in this article are the new five-step revenue recognition model that is aligned with IFRS 15 and the revised lease accounting model that now requires lessees to recognise most operating leases on the balance sheet and is consistent with IFRS 16.

Revenue recognition changes

The new five-step revenue recognition model within FRS 102 is particularly relevant for entities that provide bundled goods/services, warranties and have variable consideration 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, depending on which transitional approach is applied.

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 changes to revenue recognition may also impact the amount recognised as revenue for future years. This will mean that the timing of tax liabilities may change from previous expectations. Consequently, careful cashflow planning to prepare for tax payments will be important.

For companies, recognising revenue earlier, or later, than previously may also impact quarterly instalment payments (QIPs). There would then be further cashflow implications to consider at a time when late payment interest rates are significantly higher than historically.

Lease accounting changes

Under the revised section 20 of FRS 102, lessees now need to recognise most leases on the balance sheet as right-of-use assets with a corresponding lease liability. Recognition exemptions are available for certain leases of low-value assets and short-term leases.

Previously, when operating lease rental expenses were deducted in the profit and loss account, this constituted an allowable tax expense. The changes result in an interest expense, arising from the lease liability and depreciation of the right-of-use asset being charged to the profit and loss account, instead of a rental expense. Careful differentiation between right-of-use asset depreciation and other fixed asset deprecation will be required to ensure the correct amount is deducted for tax purposes.

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 right-of-use asset includes direct costs which are capital in nature. Notable examples include lease premiums, stamp duty land tax, capital improvements, 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.

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. However, the general requirement for the lease liability to be equal to the right-of-use asset will mean there will be fewer situations than with IFRS 16 where a transitional adjustment is likely to arise.

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.

Other tax considerations

There are other, perhaps more unexpected, ways in which the changes to UK GAAP could impact a company’s tax position. A few points to watch out for are listed below.

Quarterly Instalment Payments (QIPs)

To reiterate, QIPs can add an extra layer of complexity because corporation tax is paid during the year based on estimated taxable profits. Where the FRS 102 changes alter the timing of revenue and lease-related charges, forecasts may need to be updated to reflect the new accounting outcomes. In some cases, the resulting increase in profits (including one-off transitional adjustments) may also mean a company falls into the QIPs regime when it would not previously have met the relevant thresholds. If payments are not adjusted in good time, there is a risk of over/under payment and associated interest charges. The transition year is often the highest risk period, as one-off transitional adjustments can distort reported profits and, in turn, QIP calculations.

Corporate interest restriction (CIR)

The CIR rules can restrict the amount of ‘net-tax interest expense’ that is deductible in UK companies for corporation tax purposes where this exceeds £2m.

The recognition of lease liabilities under the revised FRS 102 will typically increase the interest expense in the accounts. However, where a right-of-use 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.

It should be noted that the restriction is calculated by reference to tax-adjusted earnings, so the transitional adjustments can have an impact on the CIR calculations, potentially significantly reducing the tax deduction available in respect of finance costs.

Carried forward loss restriction

If transitional adjustments, for example in relation to revenue recognition, significantly increase the profits of the first period following the change, those profits could exceed the carried forward losses deductions allowance (normally £5m per corporate group), with the result that the use of such losses is restricted by 50% of the amount in excess of that allowance. Such a restriction may not have arisen without the transitional adjustment, so a tax liability may arise where none was expected based on the normal level of profitability of the business.

Impact on size limits and wider tax regimes

The FRS 102 changes can lead to significant transitional adjustments, both to the balance sheet and the profit and loss account. Turnover and gross assets are often used as a measure or limit for companies to fall into various tax and other regimes. Examples include the audit exemption limits, senior accounting officer regime, country-by-country reporting, pillar two, and payment practice reporting, to name just a few. All these regimes require additional work from companies and the impact of missed filings can range from penalties to criminal offences for the directors.

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 also 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.

How can we help

If  you’re unsure how the new FRS 102 requirements will impact your business from a tax perspective, our team can help you assess the changes and prepare ahead of 2026. Get in touch today.