FRS 102 lease changes 2026: what FDs need to know

The revised FRS 102 changes how UK companies account for leases, and for any finance director weighing up how to fund a commercial solar system, the timing matters. The new rules apply to accounting periods beginning on or after 1 January 2026. For most businesses preparing accounts under UK GAAP, that means the off-balance-sheet treatment of operating leases is largely gone. If solar is on your capital plan, it pays to understand the change before you sign anything.

This guide explains what the FRS 102 lease changes do, how they interact with the way you finance solar, and where the accounting difference is real versus where it is cosmetic.

What the FRS 102 lease changes actually do

Under the old FRS 102, leases split into two camps. A finance lease (one that transferred substantially all the risks and rewards of ownership) went on the balance sheet as an asset and a liability. An operating lease did not: the rentals simply hit the profit and loss account as they fell due, and the obligation sat in the notes rather than on the face of the balance sheet.

The revised FRS 102, aligning more closely with IFRS 16, removes that distinction for lessees. For accounting periods beginning on or after 1 January 2026, a lessee recognises a right-of-use asset and a corresponding lease liability for most leases. The asset is depreciated; the liability unwinds with an interest charge. So instead of a single flat rental expense, the P&L now carries depreciation plus interest, and the balance sheet carries both the asset and the debt.

Two practical exemptions survive. Short-term leases (12 months or less) and low-value asset leases can stay off balance sheet and continue to be expensed straight to the P&L. A commercial solar lease, typically running 5 to 15 years on six-figure equipment, qualifies for neither exemption. If you lease your solar system, it is going on the balance sheet.

Why this matters for financing commercial solar

The headline point: the FRS 102 2026 lease accounting change narrows the gap between an operating lease and the alternatives, because the thing operating leases used to be quietly good at (keeping debt off the balance sheet) no longer works.

That changes the comparison in a few ways:

• Covenant headroom. If your banking covenants are tied to gearing, net debt or interest cover, a newly capitalised lease liability eats into headroom in a way it previously did not. Treasurers who chose operating leases specifically to protect covenants need to revisit the maths. Worth checking now whether a financed-and-owned route leaves you in the same or a better position.
• EBITDA optics. Because rentals split into depreciation and interest, both of which sit below the EBITDA line, reported EBITDA can rise even though nothing about the underlying cash cost has changed. Useful to know if EBITDA-linked metrics matter to you, but not a reason to choose one route over another.
• The tax position is unchanged by the accounting. This is the part FDs most often conflate. How a lease is presented in your accounts does not change who claims the capital allowances. That is still driven by the legal structure of the finance, not the accounting standard.

If you are weighing leasing against owning, our finance lease vs operating lease for solar breakdown and the operating lease page set out how each behaves in practice.

Capital allowances: the part the accounting change does not touch

Solar PV is special-rate (integral-feature) expenditure. That means it qualifies for the Annual Investment Allowance (AIA) at 100% on up to £1m of qualifying spend a year, and the 50% first-year allowance on expenditure above that threshold. Both the AIA and the 50% FYA are permanent reliefs. Solar does not qualify for 100% full expensing, which is reserved for main-rate plant and machinery only. Treat any claim that solar gets full expensing as a red flag.

Who actually claims those allowances depends entirely on the finance route, and the FRS 102 changes do nothing to alter this:

• Hire purchase, equipment loan or cash purchase — the business owns the asset and claims the allowances itself.
• Finance lease — the lessor usually claims the allowances and passes the benefit through in lower rentals (unless it is a long-funding lease, where the lessee claims).
• Operating lease — no allowances for the lessee, but the rentals are deductible against profits.
• PPA — the third-party funder owns the system, claims the allowances and keeps the Smart Export Guarantee income.

This is the core reason most taxpaying businesses are better off owning the system. Routes such as hire purchase or an equipment loan keep both the capital allowances and the export income inside your business, whereas a PPA hands all of it to the funder. Our capital allowances guide works through the numbers with a full example.

VAT under the new rules

The FRS 102 lease change is an accounting matter and does not alter VAT. A VAT-registered business can reclaim the VAT on the solar equipment regardless of how it is financed. The difference is purely in timing. With hire purchase or an equipment loan you pay the VAT up front and reclaim it in the next return. With a lease, the VAT is spread across the rentals and reclaimed as each one is invoiced. Worth factoring into cash flow when you compare routes, but it is not a reason to favour one structure over another in itself.

What FDs should do before the next funding decision

A short, practical checklist:

1. Confirm your first affected period. If your year begins on or after 1 January 2026, any solar lease signed for that period is captured by the new treatment.
2. Model the balance-sheet impact. Ask your finance provider for the right-of-use asset and lease liability profile, not just the headline rental, so you can see the covenant effect.
3. Decide whether you want the allowances. If your business is profitable and pays corporation tax, owning via HP or an equipment loan keeps the AIA and 50% FYA with you. If you do not pay tax (a charity, a loss-maker), a lease or PPA may suit better.
4. Compare in pounds, net of tax. The accounting presentation is noise; the real comparison is total cost over the term after allowances and export income. Run it through our finance calculator.

For most owner-managed and mid-market businesses, the conclusion the FRS 102 changes reinforce is that ownership is the cleaner outcome. Once an operating lease has to sit on the balance sheet anyway, the historic accounting advantage of leasing shrinks, and the case for keeping the allowances and the export income in-house gets stronger.

If you want to see how the routes compare for your own figures, tell us the system size, your year-end and your tax position and we will model the after-tax cost of each. Start with a no-obligation quote and we will set out the options side by side.