Congratulations on your new home. I think you have been very sensible to live in it for a year before starting your decorating, it has given you time to consider the lighting and aspect of each room in all seasons as well as time to evaluate how you want to live in your home and exactly what you need. The lounge does look very big and bulky and will definitely dominate the room, so I would keep to the lighter colour. Don't worry about the kids and dirt - as Kookykaren said, leather cleans easily - sharp objects and textas are your bigger worry regardless of what colour you choose. Laying newspaper on the floor to the size of the lounge is another way of checking how it will look as it gives you a better indication of bulk than tape. I would keep your ottoman simple (one with storage is an excellent idea with the children), just a tone on tone fabric or a pattern using the colours in the rug on the floor of the photo of the lounge. I don't think you have room for too large an ottoman but I would have a square one made the same height as the lounge so when just you and DH are watching TV you can push it against the other end of the lounge and both have a chaise. You can then bring some colour with art work or some patterned cushions on the lounges.

Do you have a picture of the room? If you get a tan leather to go back with the grey, I would want to see cushions, throws, a rug and artwork that have lots of grey and tan to link the colour palette together. If you go for fabric, then your choices for decorating the space can potentially be broadened to your imagination... depending on what else is already in the space (that's why a photo will help).

Tan leather sofa look great with grey. I love my leather sofa, grandkids have been jumping over mine for years and still looks great, so easy to clean. I've had the fabric sofas and they always start looking shabby after a while. You can cover them, but what's the point, nice sofa and you have to cover it, no way. Just if you get leather, condition it every 6 mths, they will tell you if you buy one, only a matter of rubbing conditioner into it gently, easy

We built our house in 1975 and had a similar problem; A teeny tiny family room with too many doors. After several years of squeezing ourselves into this poorly functioning excuse of a "family" room, which has entrances in every corner bar one, plus an entry into the kitchen and sliding door to outside, in a fit of frustration, I decided that our under-utilised formal lounge/dining would be used as a living room with the TV, although we chose to keep the dining table in that room as it is a long narrow room. I made this change 26 years ago. The family room is now just a sitting area with one 2.5 seater couch and a side table at each end, no TV and is a great space for a few people to congregate in to keep the cook company or just to read. However it would have worked equally well with the dining table there. In any case, because of all the doorways, it is really just a walk-through area, but now feels spacious and "settled" instead of crowded and messy. I can recommend the change.....you will feel much less at "sixes and sevens" with your home.