Littlewoods is well-known in the UK as a business which sells various domestic goods through its websites and offers flexible payment terms (sometimes interest-bearing, sometimes not). Since Littlewoods focuses on the “families on budget” segment, its customers would regularly take those payment terms. So much so that c21% of revenue was interest on loans in financial year 2015/16.

Let’s say Littlewoods procures photographs of an own-brand dress it intends to sell. Littlewoods sells thousands of such dresses. Shoppers often take flexible payment options and, as a result, Littlewoods earns significant revenue from interest (not only from sales of dresses).

If Littlewoods pays VAT on the modelling and studio fees, can it recover the input VAT in full? Does the photograph taken relate exclusively to the dress (VATable) or partly to the interest-bearing credit (VAT exempt)?

HMRC argued that since the photographs led to credit sales which led to interest income, the input VAT should be apportioned.

Fortunately for Littlewoods, the Tribunal allowed the taxpayer’s appeal. The input VAT incurred in procuring the photographs was directly and immediately linked to the taxable sale of goods. It was linked (but only indirectly) to interest revenue.

The Tribunal took webpage layout into account. While the photographs were shown near to marketing of flexible payment methods on the Littlewoods website pages, the photos themselves did not include such marketing. If the shopper clicked for more information on flexible payment, the photo would vanish. The photo provided the appearance of the product to the shopper – it didn’t itself provide any better understanding of credit terms and conditions.

We think this is a reasonable decision that will be welcomed by similar retailers.

Would you like to know more?

To discuss the VAT implications of your business retail activities – including your marketing, and flexible payment options for your customers – get in touch with Allon Greenstein or Luigi Lungarella, or send us an enquiry.

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Income Tax and Savings: Act Before the Squeeze Tightens 

With dividend tax rates rising by 2% in 2026 and a further 2% increase on property and savings income from 2027, combined with frozen personal allowances, more people will be pushed into higher tax brackets. Relief for finance costs on property income is tightening, and state pensions will enter the income tax net for the first time. 

From 2027, ISA flexibility also changes: only £12,000 of the annual allowance can go into cash; the remaining £8,000 must be invested via a stocks & shares ISA. 

Your next steps 

1. Impact: threshold freezes and higher rates mean more taxpayers will be dragged into self-assessment. If you receive rental income, consider whether rising compliance burdens (including Making Tax Digital quarterly filings from April 2026) still justify direct ownership. 
2. Property strategy: it may be time to exit underperforming lettings or explore corporate ownership structures. Our property tax team can map the costs and benefits. 
3. Savings: expect a double hit if you hold substantial cash: a reduced cash ISA limit and higher tax on savings income. Alternative wrappers and investment options are worth exploring. 
4. Financial direction: talk to us about your long-term wealth goals. Where useful, we’ll introduce you to the BKL Wealth Management team for independent financial advice tailored to your plans for yourself, your family and your business. 

Inheritance Tax, Trusts and Estate Planning: Move Early to Protect Value 

From 6 April 2026, business property relief (BPR) will be capped at £1m for assets qualifying at 100%. Any excess value will receive only 50% relief—creating an effective 20% IHT charge above the £1m threshold. The new £1m allowance is transferrable between spouses. 

From 6 April 2025, relevant property charges for excluded property trusts created before 30 October 2024 will be capped at £5m per trust per 10-year period, covering both 10-year anniversary and exit charges. 

Your next steps 

1. Planning before April 2026: consider establishing or restructuring trusts sooner rather than later. Our tax specialists can help you to factor in knock-on taxes such as Capital Gains Tax and stamp duties. 
2. Lifetime gifting: outright gifts remain IHT-free if you survive seven years. For families involved in business, gifting sooner may lock in greater value. 
3. Will and asset ownership: With will-writing among the services we offer to business owner, we can help ensure that your structures align with your estate goals and the new BPR landscape. 
4. Trustees: check your filings. Any 10-year or exit charges accounted for after April 2025 may need amending to reflect the new cap. 
5. Specialist guidance.: our IHT, trust and estate planning experts can help you optimise wealth transfer and protect more of your estate, considering your personal finances alongside your business interests.  

Pension Salary Sacrifice: Use the Lead-In Period Wisely 

From 6 April 2029, salary sacrifice pension contributions above £2,000 per employee will attract both Employer and Employee NICs. 

Your next steps 

1. Testing scenarios: use the three-year window to determine the financial impact on both employees and the business. 
2. Communications: clear messaging and coordination between HR, finance and tax adviser is essential to keeping your employees informed. 
3. Maximising the window to 2029: salary sacrifice remains one of the most tax-efficient routes to retirement savings until the new rules take effect. 
4. Wide-ranging specialists.: our employment tax, payroll and people & culture teams can guide you through design, implementation and compliance.  

Mansion Tax / High-Value Council Tax Surcharge: Expect a Higher Annual Cost 

From April 2028, a high value council tax surcharge will apply to UK residential properties valued at £2m or more. Charges start at £2,500 and rise to £7,500 for homes worth over £5m. The tax will be levied on owners, not occupiers. 

Your next steps 

• Ownership structures and future plans: understanding how the surcharge interacts with your wider property strategy is key. Our specialists can help you plan efficiently. 

Enterprise Incentives: Position Your Business for Growth 

From April 2026: 

Company eligibility thresholds for EMI schemes rise substantially. 

Limits for EIS and VCT investments increase. 

Income tax relief for VCT investors drops from 30% to 20%. 

Your next steps 

1. Attracting talent and investment: these changes could make EMIs, EIS and VCTs more accessible to your business – but strategy matters. 
2. Expert input early: our corporate finance and fractional CFO specialists can help you design incentives, attract the right investors and fuel sustainable business growth. 

VAT 

Several VAT reforms will affect pricing, compliance and opportunities for relief for UK and overseas businesses over the next few years. 

From April 2029, all VAT-registered businesses must issue electronic VAT invoices for B2B supplies.  

From April 2026, eligible goods donated by businesses to charities will qualify for the zero rate of VAT.  

From 26 November 2025, alongside the Autumn Budget announcements, HMRC reinstated their previous policy on cross-border VAT groups, allowing overseas establishments to be included in UK VAT groups.  

Your next steps 

1. Assessing system upgrades: starting early will ensure smooth adoption. 
2. Reviewing documentation and processes: If your company makes regular donations to charities, thorough preparation will help you to benefit fully. 
3. Reviewing historic VAT: UK businesses with cross-border VAT groups should consider reclaim opportunities before claim windows close. 

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Read on for a comprehensive breakdown of the Autumn Budget announcements and our recommended next steps. If you have any questions, or would like to discuss the tax and financial implications for you, please get in touch.

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How accounting for leases is changing

Until now:

• The costs associated with operating leases, such as office buildings, lorries, or pieces of factory machinery, were categorised as operating expenses
• The accounting treatment for operating expenses under FRS 102 is to simply charge them as an expense to the P&L, reducing the company’s profits
• The only record of the company’s contractual obligation to make further lease payments has been the addition of a note towards the end of the financial statements

The concern with the above approach is that those future leasing commitments, which for some companies can amount to millions of pounds, are then not included on the balance sheet. This potentially gives a misleading, inaccurate view of the company’s net assets.

The changes to FRS 102 reflect the main changes introduced to IFRS (IFRS 16) several years ago by bringing these assets and their associated liabilities on to the balance sheet at their  present value (i.e. the value of all future cash inflows and outflows associated with the asset, discounted to present value). This largely eliminates the operating lease as an accounting concept (with a few exceptions).

Each year ‘interest’ is accrued, and the assets are depreciated, with both of these amounts being charged to the P&L. The mechanics of this calculation result in the total annual associated expense reflected in the P&L being  higher than the cash payment in the first years of the lease and  lower in the latter years, but over the life of the lease the amount is the same. In this way the lease is included in both the P&L and the balance sheet.

Watch our an introduction to the effect of the FRS 102 changes on lease accounting

An illustration

Company A enters into a five-year property lease on 1 January 2026, the first day of its financial year, at a cost of £100,000 per year, equal to £500,000 over the term of the lease.

Under the old rules, Company A would recognise an expense of £100,000 on its P&L each year for the five-year duration. No asset or liability would be recognised on the balance sheet.

Under the new rules, this asset is brought onto the balance sheet from the outset, at its net present value, discounted at an incremental borrowing rate.

(As these payments will be made in the future, and, in principle, future money is worth less than current money, the value of these payments is discounted to present terms. The annual finance charge, using the same rate as the original discount, brings these back to the present value at that time.)

If, Company A’s incremental borrowing rate is 4%, then:

• The opening balance for the asset, and the corresponding opening liability, will be £445,182
• The asset will then be depreciated over the period of the lease, i.e. £445,182 / 5 years = £89,036 per year
• The company will also recognise a finance charge of 4% of the balance of the liability, i.e. £445,182 x 4% = £17,807 in the first year, and reducing the liability by the £100,000 rent actually paid

The table below sets this out:

And the closing balances in subsequent years:

Impact on valuations

This revised model for the handling of leases will have an interesting, twofold knock-on effect on the valuations of companies with significant leasing costs.

EBITDA

Typically, trading and profitable SMEs are valued on a multiple of their normalised EBITDA (earnings before interest, tax, depreciation and amortisation).

Under the new rules, instead of the costs of the lease falling under operating costs, which are included in the EBITDA figure, the costs are instead categorised as depreciation and interest expenses, which are added back to the company’s profit in order to arrive at EBITDA.

This means that, in the case of Company A above, its EBITDA in the first year will be increased by £100,000 over what it would have been previously. After applying an appropriate multiple, Company A’s enterprise value could be increased significantly.

Net cash/debt

The second effect relates to the next part of the valuation process, where the company’s net cash/debt is added to the enterprise value to arrive at the equity value (the value that a buyer would pay to the shareholders for their shares in the company).

Under the new rules  , Company A has additional debt of £362,990 at 31 December 2026, thus decreasing the company’s equity value. This figure could increase even more dramatically for businesses with significant leasing costs.

Although the increase in debt is offset by the increase in EBITDA, for companies with lease terms of seven or more years, the additional liability will exceed the benefit from the increased enterprise value, resulting in an overall decrease in equity value.

The future

Looking ahead, it will be interesting to see how the M&A adviser community handles these effects.

Will the multiples used to value companies with high leasing costs be reduced to balance the increased EBITDA? Or will such businesses see a general rise in value off the back of this new accounting treatment?

And how will the increased liabilities be viewed? Will they be accepted as a new reality? Or will advisers instead reject them as debt-like and not include them in net cash calculations.

It is likely that, for transactions already in progress when the new accounting policies have been adopted, EBITDA and debt figures will be adjusted to reflect the old treatment, with which people are already familiar. However, it is inevitable that, over time, transactions will be concluded based on figures reported under the new rules.

It is our opinion that the likeliest outcome is that EBITDA multiples will be adjusted to reflect the increased EBITDA and debt that target companies will report.

How BKL can help

Our corporate finance team have a wealth of experience valuing SMEs across a range of industries, for a wide variety of needs, including:

• EOT disposals
• Shareholder exits
• Fundraising
• Taxation reasons
• Issuing share options or growth shares
• Litigation support
• Divorce/probate

We have deep expertise in many valuation methods, ensuring that the most correct method is used to value your business, and that the valuation you receive is fair and accurate.

We’re experienced at guiding business owners and their teams through the practical impacts of changes to accounting standards, including FRS 102. We’re here to help you to navigate the changes to both lease accounting and revenue recognition– from explaining the effect on your numbers to improving your systems and processes – so that you maintain clear, compliant financial reporting as you take your business forward.

For a chat about how we can help your business, get in touch with Daniel Shear or Mendy Shollar from our corporate finance team, or send us an enquiry.

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James comes to BKL with a wealth of experience in operations, strategy, transformation and technology. His background includes roles as a consultant at PwC and DXC, as COO for JLL’s UK and EMEA regions, and as a co-founder of international insuretech advisory business Alchemy Technology Services.

James will be working closely with other members of BKL’s senior leadership team – CEO Lee Brook, Chief Financial Officer Neill Ryder, Chief People Officer Greg McCaw, Chief Governance & Sustainability Officer Myfanwy Neville – applying his expertise to help the business grow as efficiently and innovatively as possible.

James said: “I’m excited to join the BKL team at this time of significant change and opportunity in the industry. BKL is already a business that does things differently and does the right thing. I’m really looking forward to taking us further, ensuring that colleagues are in an even better position to support our clients’ growth, coupling next generation technologies and operational excellence with BKL’s depth and breadth of expertise and capability.”

Lee said: “I’m delighted to welcome James to BKL. As we continue challenging ourselves to be our best, James’s skills and experience will be key to helping us work smarter and deliver a phenomenal, technology enabled experience to our clients.”

James’s appointment marks the latest move in our expansion of BKL’s senior-level leadership and technical expertise this year, with four new partners appointed across BKL’s tax, audit and business services teams.

For a chat about how we help clients to solve tough problems, manage risks and achieve their ambitions, get in touch with Lee Brook or send us an enquiry.

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