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Making Tax Digital update for sole traders and landlords
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The Financial Reporting Council (FRC) has updated FRS 102 to bring lease accounting in line with the international standard, IFRS 16. These mandatory changes take effect for accounting periods starting on or after 1 January 2026 (early adoption is allowed from 2025).
The most important change is that most leases, which were previously treated as “operating leases” and kept off the balance sheet, must now be capitalized.
The Lease Liability is the present value of the future lease payments. This liability is:
The ROU Asset is measured at cost, which includes the initial Lease Liability plus any initial direct costs. This asset is subsequently:
In summary: Lease costs are no longer a single rental expense. Instead, they are split into Depreciation (on the ROU Asset) and Interest Expense (on the Lease Liability).
Not all leases are capitalised. You can still treat the payments as a straight-line expense for:
These accounting changes will significantly impact your company’s key financial metrics:
| Metric | Impact | Why? |
| EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) | Expected to Increase | Lease payments move from operating expenses (which reduce EBITDA) to Depreciation and Interest (which don’t). |
| Gross Assets | Expected to Increase | The new ROU Asset adds value to your fixed assets. This might push some smaller companies above statutory audit thresholds. |
| Net Current Assets | Expected to Decrease | The current portion of the Lease Liability is included in current liabilities, reducing the net position. |
Crucial Advice: The changes to metrics like EBITDA and Interest Cover can affect your banking covenants (the financial promises you made to your lenders). It is essential to engage with your bank or key stakeholders now to discuss necessary adjustments.
THE AUTHOR
Senior Manager, Audit & Assurance
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