Revenue recognition criteria are changing from 2026 – do you know how it affects your businesses and tax? Our accountants prepared an easy to digest quick guide – read on!
From “Billing” to “Obligation”
For years, IT consultants have often recognised revenue based on when an invoice is sent or a project phase ends. From January 2026, the rules shift to a control-based model. You must now ask: “When did the client actually take control of the specific service I promised?”
1. The “Bundling” Problem
If you sell a contract that includes a software licence, initial setup, and 3 years of support, you can no longer simply recognise the total value upfront or on a flat monthly basis.
- The New Rule: You must identify if these are “distinct” performance obligations.
- The Impact: If the setup has no value without the support, the “Setup Fee” may have to be deferred and recognised over the 3-year support term, potentially lowering your Year 1 reported profit.
2. Licences: Use vs. Access
- Right to Use (Point in Time): If you deliver a “finished” piece of code or a perpetual licence that the client can use immediately without your further input, revenue is recognised when the key is handed over.
- Right to Access (Over Time): If you provide a subscription (SaaS) where the software constantly evolves, revenue must be spread over the entire subscription period.
3. The “Highly Probable” Bonus
Do you have performance-related bonuses for system uptime or project speed?
- The Change: You can only include variable fees in your reported revenue if it is “highly probable” that a significant reversal will not occur later.
- The Impact: This effectively prevents “booking” bonuses until you are certain you’ve hit the target.
Click here for detailed examples
Checklist: Contract Clauses to Review Before 2026
Review your standard Terms of Business for the following “red flags” that may trigger revenue deferral:
- “All-in-one” Pricing: Does your contract fail to split the price between distinct elements (e.g., hardware vs. software vs. support)?
- Non-Refundable Upfront Fees: Are you charging “Implementation Fees”? These often must now be deferred if they don’t represent a “distinct” service.
- Acceptance Clauses: If the client must “sign off” before you get paid, revenue might be stuck in “deferred” status until that signature arrives, even if the work is done.
- Variable Consideration: Check for “liquidated damages,” “penalties,” or “success fees.” These must be estimated and “constrained” under the new rules.
- Licence Rights: Does your contract specify if the client is buying a “right to use” (static) or a “right to access” (evolving)? This dictates whether you can book the income today or over several years.
The Corporation Tax Implications
The shift in accounting isn’t just about how your accounts look—it directly affects your Corporation Tax bill.
- Timing Mismatch: If the new rules force you to defer revenue (e.g., spreading an upfront fee over three years), your reported profit drops in the short term. This typically leads to a delayed tax liability, as you only pay tax on profits as they are recognised in the accounts.
- Transition Adjustments: On 1 January 2026, you may have “incomplete contracts.” You can choose a cumulative catch-up approach, where you adjust your opening “Retained Earnings” rather than restating previous years.
- HMRC Treatment: HMRC generally follows the “correct accounting treatment.” If your accounting profit increases or decreases due to a change in standard, that change is usually taxable (or tax-deductible) in the year of the change, though some transitional “spreading” rules may apply to prevent massive one-off tax shocks.
- Deferred Tax: You will likely need to account for Deferred Tax to bridge the gap between when a transaction is “earned” for tax purposes versus when it appears on your P&L.
Confused about how recent changes apply to you? Skip the jargon and send us a quick message – we’ll tell you exactly what the 2026 shift means for your business!
Based in Southampton, we’re fully qualified accountants regulated by AAT.