What FRS 102 changes mean for UK GAAP and tax

Generally accepted accounting practice in the UK (UK GAAP) is moving closer to international accounting standards, with changes to FRS 102 (the principal financial reporting standard under UK GAAP) coming into effect for accounting periods beginning on or after 1 January 2026. Some of the most significant changes will see operating leases being brought on balance sheet and the introduction of new rules governing revenue recognition. While the focus of many affected businesses will be on the impact of the changes on their financial statements, the tax consequences shouldn’t be forgotten and may be far from obvious.

Adjustments to bring the historic accounting position in line with the new rules will be reflected in the financial statements either by restating comparatives for the period prior to the change, or by adjusting opening reserves. Where such adjustments are made on a change of accounting policy, the corporation tax rules generally provide for the transitional amount to be taxed or deducted in the first period in which the new accounting standard applies.

Transitional adjustments and their tax implications

However, a specific tax spreading rule applies to transitional adjustments on leases, which from an accounting perspective normally result in an acceleration in the recognition of the costs of the lease. The special tax rule means the associated tax deduction is not accelerated, and is instead deferred and recognised over the remaining weighted average life of the affected leases.

This spreading does not apply to adjustments arising from the changes to revenue recognition, which could result in significant transitional amounts hitting the tax return in the first period in which the amendments to FRS 102 apply. Those amounts could either increase or decrease taxable profits Companies paying tax through quarterly instalments could be paying tax for the first affected period as early as March 2026, so it’s important to understand the likely impact at an early stage to avoid potentially costly interest charges and/or unwelcome cash flow surprises.

Key tax risks to consider following FRS102 changes

However, 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.

• 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.
• Corporate interest restriction (CIR): The CIR rules can limit the tax deduction available in respect of UK interest cost where this exceeds £2m. The restriction is calculated by reference to tax-adjusted earnings, so the transitional adjustments can have a significant impact on the CIR calculations, potentially significantly reducing the tax deduction available in respect of finance costs. There is an election that has the potential to mitigate this impact in some circumstances; however, this election is irrevocable and can have other knock on consequences, so should be considered carefully ahead of any decision being made.
• Wider tax regimes: The FRS 102 changes can lead to significant adjustments, both to the balance sheet and the income statement. 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 senior accounting officer regime, country-by-country reporting, pillar two, and payment practice reporting, to name just a few. All of these regimes require additional work from companies and the impact of missed filings can range from penalties to criminal offences for the directors.

Preparing for FRS 102 changes

As with so much in life, getting prepared early can help avoid potential shocks. Anticipating the impact of changes to UK GAAP will not only help companies understand the impact on their tax liability, but they will also have the space to explore any wider considerations these accounting changes may have triggered.

To ensure your business is compliant under FRS 102 and prepared for the 2026 changes, please get in touch with Sarah Hall or your usual RSM contact.

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