What do the new lease accounting rules under FRS 102 mean for tax?

24 June 2026 | posted in Audit & Assurance Accounting services Accounts preparation Business tax

One of the major changes being introduced under FRS 102 is how operating leases, such as property, vehicles and equipment, are accounted for. The changes bring with them some potential tax impacts which companies need to prepare for. So what do the new lease accounting rules under FRS 102 mean for tax purposes?

The general rule (and what’s changed)

In most cases, operating leases that are capitalised as right-of-use (ROU) assets will be treated for tax purposes in much the same way as finance leases always have been.

In practice, that means you can usually claim a tax deduction for two things:

Depreciation of the ROU asset
The finance costs that hit your profit and loss account each year

So whilst the accounting presentation has changed, the tax treatment is relatively aligned with what we’ve seen before for finance leases.

There are a few exceptions worth keeping in mind. For example, if your lease includes a transfer of ownership (think hire purchase arrangements), the asset may qualify for capital allowances instead. But in reality, most of these arrangements were already capitalised under the old FRS 102 rules, so you shouldn’t see much change in either accounting or tax treatment here.

One area people often overlook is direct capital costs. If your ROU asset includes things like SDLT on a land lease, those costs need to be separated out—because they’re likely to be disallowed for tax purposes.

What about deferred tax?

Because the tax treatment broadly follows the new accounting approach, there’s generally no big difference between your accounts and your tax position. That means, in most cases, no deferred tax to worry about.

However, things can get a bit more complicated when you first adopt the new rules.

If you’ve had to adjust reserves on transition, that adjustment is spread for tax purposes over the average life of the leases. As a result, you might see some deferred tax implications in those early periods after adoption.

It’s not usually a long-term issue, but it’s definitely something to plan for in your first set of accounts under the new standard.

Corporate Interest Restriction (CIR)

One knock-on effect of the changes to lease accounting is the impact on corporate interest restriction (CIR).

Because part of your lease cost is now treated as a finance charge, your total interest expense in the accounts will likely increase. That can push more businesses into CIR territory, or increase the risk of an interest disallowance.

That said, there’s a helpful carve-out. If a lease would have been classified as an operating lease under the old rules, the related finance costs are excluded from the CIR calculation.

However, you still need to work out how each lease would have been classified under the old FRS 102 rules (i.e. whether leases would have been operating leases or finance leases). That historic distinction still matters for tax purposes.

Wider implications

The accounting changes don’t just affect your lease numbers—they can affect other areas too.

For example, bringing leases onto the balance sheet increases your gross assets. That could affect your eligibility for certain tax reliefs, including:

Enterprise Investment Scheme (EIS)
Seed Enterprise Investment Scheme (SEIS)

If you’re close to the thresholds for these schemes, it’s definitely worth reviewing the impact sooner rather than later.

Similarly, the changes may also cause businesses to:

Lose their audit exemption
Fall into Senior Accounting Officer (SAO) requirements
Trigger Pillar Two or country-by-country reporting thresholds

So it’s not just a technical accounting change—it can reshape your compliance landscape too.

Timing of profits (and why it matters)

Although the total cost of a lease remains the same over its life, the new rules tend to front-load expenses. In other words, you recognise more cost upfront and less later on.

That can reduce profitability in the early years—but increase it in the later stages of the lease.

From a tax perspective, that means you might end up with higher taxable profits further down the line than you expected. And in some cases, that could push you into new obligations, like needing to make quarterly instalment payments for corporation tax.

You can read about the tax impact of the changes to revenue recognition here.

How Moore East Midlands can help

Our tax experts can make sure you stay compliant under the updated FRS 102 rules—whether that’s:

Reviewing lease classifications
Managing tax reliefs
Assessing CIR exposure
Or helping you plan for cashflow and payment timing

The key is getting ahead of the changes, not reacting to them after the fact. If you’d like to understand more about what the new lease accounting rules under FRS 102 mean for tax, get in touch with one of our team for further advice and support.