Lease accounting changes -The hidden impact on tax

Beyond audit considerations, the lease accounting changes will have major tax implications. Five key areas stand out where these changes could have unintended and potentially damaging effects:

1) Venture Capital Relief at risk – action required

If your business is planning to raise investment under the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS), these changes could put that funding at serious risk. Under EIS, companies must have gross assets below £15 million immediately before issuing shares. With the new lease accounting rules potentially inflating your balance sheet, you could be disqualified from receiving vital investment.

For startups seeking SEIS, the danger is even more pronounced, as the asset limit is a mere £350,000. A minor adjustment to lease accounting could suddenly push you over the threshold and out of eligibility. The consequence? Lost investment, lost opportunities, and a major setback in growth.

Time is of the essence—businesses looking to raise funds should accelerate their EIS or SEIS claims before these changes impact their eligibility.

2) Enterprise Management Incentives (EMI) under immediate threat

One of the most powerful employee incentive tools, Enterprise Management Incentives (EMI), could be taken off the table for many companies due to these accounting changes. Currently, businesses with gross assets below £30 million can potentially offer tax-advantaged EMI share options to their key employees (subject to meeting all other relevant conditions). That £30million is tested at the date of grant of any EMI share options, and based on the presumption that a company or group’s accounts are prepared in accordance with generally accepted accounting practice. Once leases need to be recognised on the balance sheet, many businesses might breach this gross asset limit—rendering them ineligible for EMI schemes.

Without EMI, businesses may struggle to attract and retain top talent, as alternative incentive schemes such as CSOP (Company Share Option Plans) are generally less advantageous compared to EMI.

If you are considering implementing an EMI scheme, you should act now before it’s too late.

3) Off-payroll worker rules (IR35) and Business size classification

The exemption from the ‘new’ IR35 rules for small private sector businesses (introduced in 2021) is based on the Companies Act 2006 definition of business size. With new thresholds applying for periods from April 2025, some businesses may continue to qualify as ‘small’ and be exempt from IR35 obligations; indeed, it might initially ‘push’ previously non-small businesses outside of the 2021 off-payroll worker rules. However, once leases are recognised on the balance sheet, they could breach the size criteria, forcing them into, or back into, compliance with the ‘new’ 2021 IR35 regime. This could lead to significant additional compliance costs and risks for businesses engaging contractors. HMRC are showing increasing activity in this area, with IR35 (and extended payroll compliance) enquiry letters landing on the doorstep of a number of businesses in recent months.

4) Transfer pricing SME exemption

Transfer pricing rules offer exemptions for Small or Medium-Sized Enterprises (SMEs), one of which is based on the balance sheet total being below €43 million. The new lease accounting rules could inflate balance sheets, making some businesses ineligible for these SME exemptions and subjecting them to more complex and costly transfer pricing regulations. Companies engaged in cross-border transactions, in particular, should review their status now.

5) Enhanced R&D intensive support

Certain loss-making businesses are able to claim beneficial tax credits from HMRC for their qualifying R&D activities. Eligibility for that support is not only based on the degree of expenditure relating to R&D (the ‘intensity condition’); it is only available to SMEs.

Here, the test is different to that which applies for transfer pricing – it is set at twice those thresholds – nevertheless, leases accounted for as assets on the balance sheet would impact the gross asset test and potentially prevent claims under this more advantageous R&D regime.

There are other areas of the tax code where these changes may also have an impact.

For example, the interest restriction rules for qualifying infrastructure companies could be affected, as could the thresholds determining whether a company or group falls into the Senior Accounting Officer (SAO) requirements. Additionally, the qualifying criteria for recognition as a Real Estate Investment Trust (REIT) may also be impacted, as well as whether a company is considered ‘Property Rich’ for the purposes of the Capital Gains Tax ‘indirect disposal’ rules.

However, at present, our expectation is that the five areas highlighted above will have the most significant impact on the tax affairs of owner-managed businesses—at least in an indirect and, in our view, unintended way.

It is also important to remember that ‘total assets’ is a size threshold relevant for the Economic Crime and Corporate Transparency Act (ECCTA) provisions. Read more on those rules here.

While it remains unclear whether HMRC will introduce carve-outs to mitigate the impact of these changes on tax thresholds, we strongly recommend that businesses take proactive steps now. Key actions include:

• Reviewing eligibility for EIS and SEIS funding and fast-tracking investment rounds before the rules impact asset calculations.
• Accelerating EMI scheme implementation or further granting of options before lease recognition potentially disqualifies businesses.
• Assessing IR35 exposure and preparing for possible classification changes.
• Re-evaluating transfer pricing policies to avoid compliance pitfalls.
• Consider potential impact on R&D qualification and cashflows relating to R&D activities.

The impact of these changes is not just about compliance—it directly affects funding opportunities, employee incentives, and tax efficiency. Businesses that take action now will be better positioned to navigate these complex changes and minimise disruption.

If you need expert guidance on how these changes will affect your company,  Contact us here.