SaaS accountants who understand deferred revenue.

Subscription revenue is earned over the period of the subscription, which is often different from when the cash arrives. If the books treat the two as the same, your accounts, runway and investor reporting stop agreeing with each other.

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We act for UK SaaS and software startups. We recognise subscription revenue over the period in which it is earned, keep monthly and annual recurring revenue consistent with the statutory accounts, claim R&D relief on qualifying engineering work, and account for VAT correctly when customers are outside the UK.

A common error on a SaaS company's books is an annual contract booked as revenue on the day it was invoiced. That overstates revenue in the first month, understates it in the eleven months after, and produces accounts that contradict the monthly recurring revenue (MRR) chart in the board pack. Investors who compare the two will ask why they differ.

Deferred revenue needs to be built into the monthly bookkeeping, so that nothing has to be corrected at the year end. Your accounts and your revenue metrics then agree, and a runway worked out from the accounts is no longer overstated.

A worked example comparing the two R&D routes

A loss-making UK SaaS company with a year ending 31 March. It is a small or medium-sized enterprise (SME) for R&D purposes: fewer than 500 staff, and turnover of no more than €100 million or a balance sheet of no more than €86 million, counting linked and partner businesses. Total expenditure is £600,000. Of that, £220,000 is qualifying R&D, made up of engineering time on technically uncertain work and the cloud and data costs behind it. PAYE and National Insurance for the year come to £45,000.

Intensity: £220,000 ÷ £600,000 = 36.7%, above the 30% threshold, so the intensive route (Enhanced R&D Intensive Support) is available.
Intensive route: £220,000 × 186% = £409,200 surrendered, at 14.5% = £59,334 in cash.
Merged scheme: £220,000 × 20% = £44,000, taxed at the small profits rate, leaving £35,640.
Loss check: the £409,200 surrendered cannot be more than the trading loss. With total expenditure of £600,000 plus the extra deduction of £189,200 (86% of £220,000), the trading loss is £789,200 minus the company's income, so income for the year has to be £380,000 or less.
Cap check: £20,000 + (300% × £45,000) = £155,000. The credit is below the cap, so it is paid in full.

On these figures the intensive route pays £23,694 more for the same work. The intensive route is optional, so if income is high enough for the loss check to cut its credit below £35,640, the company can claim under the merged scheme instead. Leaving out the cloud costs, which have qualified since April 2023, would make the claim on either route smaller.

Illustrative figures. We run the calculation on your own numbers before anything is filed.

Run your own numbers

The numbers that matter in a SaaS company

Deferred revenue: An annual plan paid up front is a liability until you have delivered the service. Recognising it month by month keeps the accounts in line with your MRR chart. Recognising all of it when you invoice overstates that month and makes the following months look as if revenue has fallen.
Cloud and data costs: Hosting, data licences and computing power are a cost of sale, and part of them may qualify for an R&D claim. Record them separately in the books so the qualifying part can be identified.
Engineering payroll: Usually the largest cost, and the one that decides the size of an R&D claim. Record each month which engineers spent what proportion of their time on technically uncertain work, while it is still easy to evidence.
VAT on overseas customers: VAT on digital services depends on where your customer is (the place of supply), and the rules differ for business customers and consumers. Correcting the wrong treatment across a few hundred subscriptions is expensive.

R&D relief for software companies

HMRC's test is technical. The work must seek an advance in science or technology. Building a well-made product on established frameworks does not meet the test, however hard the work was and however new the business idea.

Work that usually qualifies includes algorithms with no published solution, making a system perform at a scale where the standard architecture fails, integrations that needed experiment, failure and redesign, and machine learning work where it was unknown at the outset whether the approach would work.

Work that usually does not qualify includes standard web and mobile applications, interface design, configuring off-the-shelf software, connections to other software that worked as documented, data migration, and testing that took effort but involved no technical uncertainty.

Two things then affect the size of the claim. Cloud computing and data licence costs qualify, which matters to a company whose infrastructure bill is one of its largest costs. And the PAYE cap limits the payable credit to £20,000 plus 300% of your PAYE and National Insurance bill, which reduces claims for teams whose engineers invoice through their own companies instead of being on the payroll. How you hire sets the cap long before the claim, so model it before you decide.

How we handle R&D claims SEIS and EIS

What we do for SaaS companies

Revenue recognised over the subscription period in the monthly bookkeeping
Monthly and annual recurring revenue and churn that reconcile to the statutory accounts, so the board pack and the filed accounts agree
R&D claims on qualifying engineering work, with the cloud and data costs included and the PAYE cap modelled first
VAT registration and place-of-supply treatment for customers outside the UK
Enterprise Management Incentive (EMI) share options for engineers, with the share valuation agreed with HMRC
Runway and monthly cash burn worked out with deferred revenue taken into account

Common questions

How should a SaaS startup recognise annual contracts?

Over the period in which the service is delivered. An annual plan paid up front creates deferred revenue, which is a liability on the balance sheet and is released into the profit and loss account month by month. Recognising the whole contract when you invoice overstates revenue in that month and understates it in the following eleven.

Does our cloud bill qualify for R&D relief?

Cloud computing and data licence costs have qualified since April 2023, so the computing costs behind technically uncertain development work can go into a claim. Hosting for a live product does not qualify. You need to be able to justify the split, which is easier if you track it through the year.

We sell to customers in the EU and the US. Where is our VAT due?

For digital services, the place of supply follows the customer. Sales to business customers outside the UK are generally outside the scope of UK VAT, and the customer accounts for any local tax under the reverse charge. Sales to consumers are taxed where the consumer is, which can create VAT obligations in their country. Settle the treatment before you have a few hundred subscriptions to correct.

Do you work with pre-revenue software companies?

Yes. Before revenue, the share structure, the R&D position and payroll decisions are still cheap to change. All three are expensive to change once there is a valuation and an investor on the register.