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      The clock is ticking – the amendments to UK GAAP lease accounting are coming into force from January 2026. Excitement and anticipation is doubtless growing among users of FRS 102.

      The right-of-use asset and lease liability concept is now quite well understood, certainly amongst IFRS users and their advisers. The tax rules were tweaked in 2019 to accommodate right-of-use assets and lease liabilities and I do not expect further changes to tax statute should be needed to cope with the coming UK GAAP changes. HMRC have not made any new pronouncements. If they did, I expect it would be simply to confirm that the rules for right-of-use assets and lease liabilities will apply equally to such leases under both IFRS and UK GAAP going forward.

      Practical experience with IFRS right-of-use assets and lease liabilities since 2019 makes me think that the same issues will be hot for UK GAAP companies.

      The following points are not the whole story by any means, but in ascending order of complexity I would highlight:

      Michael Everett - Director, Fixed Asset Tax Services
      Michael Everett

      Director, International Corporate Tax

      KPMG in the UK

      • First, simply grappling with the basic concepts until these have been properly learned.
      • Then, satisfying HMRC that tax deductions being taken in returns are permissible – a large number of letters were issued during 2024 as HMRC were concerned that tax relief might have been claimed for depreciation of capital amounts. Theoretically the (non) deductibility of these amounts has not altered but it may be harder to spot them when capital items have been rolled into a right of use asset and then depreciated. Especially if one has learned the basic principle that right-of-use rental deductions follow the GAAP P&L. For example lease premiums and SDLT costs continue not to be deductible.
      • A significant compliance burden for some companies on moving to IFRS 16 was the transitional spreading rules. We now know that these will only need considering under UK GAAP if a company makes an (accounting) election to adopt the IFRS 16 numbers used by its IFRS parent as the starting right of use asset and lease liability amounts.
      • Finally, unpicking the accounting for more complex situations, usually involving real estate - such as landlord contributions, sale and leasebacks. If the apparent tax outcome seems wrong, it probably is. There is no substitute for a cold towel. It ought to be possible to get to the right answer especially if one remembers that the law on finance leases (and right-of-use assets) and lease liabilities is not all found in the legislation.

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