Accounting for UK SaaS companies: MRR, ARR and recurring revenue
How UK SaaS companies should handle deferred revenue, MRR, ARR and SaaS-specific FRS 102 issues.
Accounting for UK SaaS companies sits at the intersection of two worlds: the operational metrics that investors care about (MRR, ARR, churn, CAC, LTV) and the formal accounts that HMRC and Companies House expect (FRS 102 revenue recognition, deferred income, capitalised development costs). Get them aligned and your monthly board pack and your annual accounts tell the same story.
Revenue recognition under FRS 102
A typical SaaS contract bills annually in advance for a 12-month subscription. Cash arrives day one; revenue is earned over the year.
| Month | Cash received | Revenue recognised | Deferred income balance |
|---|---|---|---|
| 1 | £12,000 | £1,000 | £11,000 |
| 2 | 0 | £1,000 | £10,000 |
| … | … | … | … |
| 12 | 0 | £1,000 | 0 |
Recognise on a straight-line basis where the service is delivered evenly. The unearned portion sits as deferred income on the balance sheet. See our existing deferred income chart-of-accounts page and the revenue recognition principles overview.
The 2026 FRS 102 amendments introduce a five-step model aligned with IFRS 15. SaaS companies will need to identify performance obligations (subscription, set-up, premium support), allocate transaction price, and recognise revenue as each obligation is satisfied. Plan transition early.
MRR and ARR
| Metric | Definition |
|---|---|
| MRR | Sum of normalised monthly recurring revenue at period end |
| New MRR | MRR added by new customers |
| Expansion MRR | MRR added by upgrades from existing customers |
| Churned MRR | MRR lost from cancellations |
| Contraction MRR | MRR lost from downgrades |
| Net new MRR | New + Expansion - Churned - Contraction |
| ARR | MRR x 12, the run-rate of subscription revenue |
ARR is a forward-looking metric and must not be reported as turnover in your statutory accounts. Keep the management view (ARR) and the statutory view (recognised revenue) reconciled in a single workbook.
Customer acquisition costs
Sales commissions, agency fees and prospect-specific marketing spend can be capitalised under FRS 102 if they meet the asset definition. The current Section 23 has limited guidance; the 2026 amendments will introduce explicit rules similar to IFRS 15 for incremental contract costs.
A common policy:
- Capitalise sales commissions where amortisation period > 12 months
- Amortise over the expected customer life (often 24-36 months)
- Disclose the policy clearly in the accounting policies note
R&D capitalisation
Software development costs may be capitalised as an intangible asset under FRS 102 Section 18 if they meet six tests (technical feasibility, intent to complete, future economic benefits, etc.). Many SaaS companies expense everything to keep accounts simple; growth-stage companies often capitalise to align with investor expectations.
Capitalised development is amortised over its useful life, typically 3-5 years for software. Pair this with R&D tax credits for SMEs which can apply even to expensed work.
VAT and overseas customers
| Customer type | VAT treatment |
|---|---|
| UK B2B | 20% standard-rated |
| UK B2C | 20% standard-rated |
| EU B2B | Outside scope (general B2B place of supply) |
| EU B2C | UK 20% (post-Brexit; non-Union OSS for some) |
| Non-EU B2B | Outside scope |
| Non-EU B2C | Place of consumption rules apply |
If you sell digital services to EU consumers, the Non-Union OSS scheme via Ireland or another member state simplifies the VAT registration burden.
Operational KPIs to track
- Net Revenue Retention (NRR)
- Customer Acquisition Cost (CAC)
- CAC payback period
- Gross margin (after hosting and support)
- Rule of 40 (growth rate + EBITDA margin)
- Logo and revenue churn rates
Wrap-up
SaaS accounting is unforgiving on cut-off, deferred income and metric definitions. Pair this with our deferred income and revenue recognition article and recurring invoices workflow. The HMRC VAT on digital services page is the official VAT source. See pricing for software designed around recurring revenue.