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I work with a fair number of professional services businesses consultancies, engineering firms, surveyors, IT companies and there’s a assumption I run into constantly. Directors in this sector tend to think their accounts are straightforward. No stock, no fleet, no complicated supply chains. Just people, time, and invoices.
I understand why it feels that way. But it’s one of the more misleading assumptions in accounting, and the FRS 102 changes coming in for accounting periods starting on or after 1 January 2026 are about to prove the point.
The truth is that professional services firms have some of the most quietly complex year-end positions of any sector. Revenue that’s genuinely difficult to pin down. Contractor relationships that carry real tax risk. Director remuneration decisions worth thousands if you get them right and thousands if you don’t. And now a set of accounting standard changes that hit this sector harder than most directors expect.
Let me walk through what’s actually changing, what it means for your firm, and where I’d be focusing if this were my business.
Here’s where professional services firms get caught, and the new FRS 102 makes it sharper.
When you sell time and expertise rather than a physical product, working out exactly when you’ve “earned” your revenue is genuinely difficult. You might be six weeks into a four-month consultancy engagement at your year-end. You’ve done the work, but you haven’t invoiced it yet. Or you’ve invoiced upfront for a project that won’t be delivered until next year. Or you’re on a fixed-price contract where you’ve done 70% of the work but only billed 40%.
Under the revised FRS 102 revenue model which now follows the same five-step approach as IFRS 15 you can’t just recognise revenue when you happen to raise an invoice. You have to look at each contract, identify what you’ve actually promised to deliver, and recognise revenue as you satisfy those obligations.
For a professional services firm this means getting properly to grips with concepts many smaller firms have handled loosely or not at all:
Accrued income work you’ve done but not yet billed. Under the new model this needs to be recognised as revenue at year-end if you’ve satisfied your performance obligations, even though no invoice has gone out. Many firms under-recognise here and understate their true position.
Deferred income money you’ve been paid for work not yet done. If a client has paid you upfront for a project spanning your year-end, the portion relating to undelivered work has to be deferred to next year. Get this wrong and you overstate profit and pay corporation tax early on income you haven’t really earned yet.
Contract assets and the percentage-of-completion question for longer fixed-price engagements, you may need to recognise revenue based on how far through the work you are, not when you bill. This requires you to actually measure progress in a defensible way, which a lot of firms have never had to document.
The practical upshot: your year-end revenue figure under the new standard may look quite different from what you’re used to. For a profitable consultancy with several engagements straddling the year-end, the difference can be material and it flows straight through to your tax bill.
If you take one thing from this section: start tracking work-in-progress and the status of every open engagement properly, well before your transition date. The firms that walk into FRS 102 transition with clean, well-documented contract records will have a far easier time than those reconstructing it all at year-end.
When directors hear about the FRS 102 lease accounting changes, the ones who aren’t running fleets or warehouses tend to switch off. Don’t.
The new approach brings most leases onto the balance sheet you recognise a right-of-use asset and a corresponding lease liability for things you previously just expensed as you paid for them.
For a professional services firm, the obvious one is your office. If you lease your premises on anything beyond a very short term, that lease is likely coming onto your balance sheet. So are leased company cars, leased IT equipment and servers, leased office equipment, and any serviced office arrangements that meet the definition.
The effect is the same as it is for any other sector. Your balance sheet grows. Your liabilities increase, which changes how lenders and anyone else reading your accounts perceive your gearing. Your profit profile shifts, because instead of a smooth rental expense you now have depreciation on the asset and interest on the liability.
Two specific things to watch in this sector. First, if you’re a firm that’s grown and taken on a larger office on a multi-year lease, the balance sheet impact can be more significant than you’d guess. Second and this catches people if your gross assets jump because of new right-of-use assets, you could cross a company size threshold. That can affect your filing requirements and, in some cases, whether you need an audit. Worth checking before it surprises you.
This isn’t strictly an FRS 102 issue, but it’s so central to this sector’s tax risk that I can’t write a useful piece without it.
Professional services firms run on flexible resource. You bring in contractors, associates, freelance specialists, and subcontracted expertise as projects demand. It’s how the model works. But every one of those relationships carries employment status risk, and HMRC has been increasingly active here.
The core question is whether someone you’re treating as a contractor should, in reality, be treated as an employee for tax purposes. If HMRC decides they should, the PAYE and National Insurance liability lands on your business along with interest and penalties that can stretch back years.
The risk is highest where the same contractors work with you over long periods, where you control how and when they work, where they don’t genuinely operate for other clients, and where the working relationship looks and feels like employment in everything but name.
The off-payroll working rules (IR35) shifted responsibility for determining status onto medium and large businesses engaging contractors through their own limited companies. Even if you’re a smaller firm currently outside those rules, the underlying employment status risk has never gone away and your size classification can change, as we’ve just seen with the lease accounting point.
What I’d be doing: a proper status review of every material contractor relationship, written contracts that genuinely reflect the working arrangement, and periodic checks rather than a one-off assessment filed and forgotten. This is not box-ticking. It’s one of the most expensive things to get wrong in this sector.
For most professional services firms, the directors are also the owners, and how you pay yourself is one of the most consequential tax decisions you make each year. It’s also one where the right answer keeps moving as tax rates and thresholds change.
The salary-versus-dividend balance, the timing of dividends across tax years, pension contributions as a tax-efficient extraction method, the use of available allowances these aren’t set-and-forget decisions. They need reviewing every year against current rates, your profit level, and your personal circumstances. A firm that structured its director pay optimally three years ago may be leaving real money on the table today simply because the landscape moved and nobody revisited it.
This is exactly the kind of thing that gets missed when your accountant simply files your numbers rather than actively planning with you. A proactive year-end review should always include a proper look at how the directors are being remunerated and whether there’s a more efficient structure available within the rules.
Pulling the accounting and tax threads together, the FRS 102 transition has direct tax consequences that professional services directors should plan for now rather than discover later.
Where the new revenue recognition rules accelerate your income recognising accrued income earlier, for instance you may face earlier taxable profits and earlier corporation tax payments. Transitional adjustments in the changeover year can create one-off tax effects that catch firms unprepared. And the interaction between these accounting changes and your existing position any losses carried forward, your director remuneration strategy, your cash flow needs to be modelled properly rather than left to surface at filing.
The firms that handle this well will have done an impact assessment a good year ahead, understood where their profits land under the new rules, and planned their tax position around it. The firms that don’t will get a nasty surprise.
If I were running a professional services business heading into 2026, here’s roughly where I’d start.
I’d get my work-in-progress and open engagement records into proper shape first, because the revenue recognition changes are where this sector is most exposed and good records make everything else easier. I’d list every lease in the business office, cars, equipment, IT and work out the balance sheet impact before transition, paying particular attention to whether it pushes me over any size or audit threshold. I’d commission a genuine status review of my contractor relationships rather than assuming they’re fine. And I’d make sure my director remuneration was being actively reviewed each year against current rates, not just rolled forward.
None of this is urgent in the sense of needing doing this week. All of it gets harder, and more expensive, the longer it’s left.
The reason professional services firms get caught out isn’t that they’re careless. It’s that the complexity is hidden. There’s no warehouse full of stock to remind you that accounting matters, no fleet depreciating on the forecourt. Just invoices and people and the quiet assumption that it’s all fairly simple.
It isn’t. And in 2026, with FRS 102 reshaping how revenue and leases are accounted for, the gap between firms that take their year-end seriously and those that treat it as a formality is going to widen.
If you run a consultancy, engineering firm, surveying practice or IT business and you’d like to talk through any of this how the FRS 102 changes affect you specifically, your contractor risk, or your remuneration structure I’m happy to have that conversation. No charge for the first chat, and no sales routine.
Ashish Paudel
Founder,
Nexus Financial Experts
hello@nexusfinexp.co.uk | 02039513891 |
nexusfinexp.co.uk
This is general information, not formal advice for your specific situation. Every firm is different get tailored advice before acting on any of it.