SaaS Intercompany Revenue: How to Eliminate Internal Sales and Protect Metrics

Why Eliminating Intercompany Revenue is Crucial for SaaS Startups

As your SaaS startup expands, perhaps opening a new entity in the US or UK for sales and support, complexity grows. Suddenly, your UK development entity is 'selling' a software license to your US sales entity. An invoice is raised, revenue is booked, and everything seems fine. But this creates a dangerous illusion in your financial reporting. You are, in effect, recognizing revenue from paying yourself. This isn't just a technical accounting issue; it directly impacts your key metrics, your relationship with investors, and your tax exposure. Learning how to handle intercompany revenue in SaaS startups is not an esoteric topic for a big-company CFO. It is a foundational step to building a scalable, fundable business.

Foundational Understanding: The Internal Customer Problem

Intercompany revenue arises when one legal entity within your group sells goods or services to another entity in the same group. For a SaaS company, this typically involves a development entity (e.g., a UK parent company) licensing its software to a sales entity (e.g., a US subsidiary) for an internal fee. The sales entity then sells the software to external, paying customers.

From the UK entity’s perspective, it has generated revenue. From the US entity’s perspective, it has incurred an expense. Both of these individual, or entity-level, records are correct for statutory purposes. The problem emerges when you need to see the complete picture. For investors, board members, and tax authorities, the performance of the entire group is what matters. This requires creating consolidated financial statements, which combine the results of all entities into a single, unified report.

This is where the principle of 'elimination' comes in. When you consolidate, you must remove the effect of all internal transactions to avoid artificially inflating the group's performance. The revenue the UK entity booked from the US entity is not new money coming into the group. It is just money moving from one of your pockets to another. True revenue only comes from external customers. Answering the question, "How can revenue not be revenue?" is simple: when the customer is yourself.

The Consequences of Improperly Handled Intercompany Revenue

The consequences of getting this wrong are not theoretical. They create tangible problems that affect fundraising, operations, and compliance. Almost every multi-entity SaaS company eventually reaches a point where they must address these critical issues.

Misstated Metrics and Damaged Investor Credibility

First and most critically, improper handling leads to double-counting revenue and misstated Monthly Recurring Revenue (MRR). Imagine your US entity sells a $10,000 subscription to a real customer. At the group level, that's $10,000 in revenue. But if the UK parent company also charges the US entity a $7,000 internal license fee for that same subscription, your unconsolidated reports might show $17,000 in total 'revenue' ($10,000 in the US, $7,000 in the UK). This inflated number makes its way into investor dashboards and internal reports, distorting your unit economics and growth metrics. Investors fund real, external growth, and discovering inflated internal figures can seriously damage credibility during due diligence.

Significant Tax Risk from Unclear Transfer Pricing

Second, unclear documentation for these internal software charges creates significant tax risk. This is a key area of focus for group company revenue reporting. Tax authorities like HMRC in the UK or the IRS in the US require that the 'price' charged between entities is fair and defensible. This concept, known as transfer pricing, ensures companies are not shifting profits to lower-tax jurisdictions artificially. Without a clear policy justifying your internal charges for related party transactions in SaaS, you expose the group to potential tax penalties, audits, and adjustments. You must be able to justify why the UK entity charged the US entity a specific amount.

Painful and Inefficient Month-End Close Processes

Third, relying on manual spreadsheets for reconciling these cross-entity invoices is a direct route to a painful month-end close. The finance lead, often working with external accountants, spends days matching invoices, checking exchange rates, and manually adjusting numbers. This tedious reconciliation work becomes a major bottleneck, derailing timely board reporting. When leadership makes strategic decisions based on outdated or inaccurate data, the business suffers. The practical consequence is a slow, frustrating close process that prevents the finance function from focusing on more strategic analysis.

A Practical Framework for How to Handle Intercompany Revenue in SaaS Startups

So, how do we actually handle this? The solution is a systematic, two-step process that works within the tools most startups already use, like QuickBooks or Xero. The goal is to properly record the transaction at the entity level for legal and tax purposes, then eliminate it at the group level for accurate reporting.

Step 1: Record the Transaction at the Entity Level

First, you need dedicated accounts in your Chart of Accounts to isolate these internal transactions. In both your parent and subsidiary company files (in your accounting software), create the following:

• An 'Intercompany Revenue' account: This is typically an 'Other Income' type account where the selling entity records the income from the related entity. Using this account type keeps internal revenue separate from your main external revenue streams.
• An 'Intercompany Expense' account: This is often a 'Cost of Goods Sold' or 'Operating Expense' account where the buying entity records the cost of the internal service or license.

By using separate accounts, you clearly distinguish internal sales from revenue generated by external customers. This makes the elimination process much cleaner and less prone to error.

Step 2: Post the Elimination Entry at the Group Level

At the end of the month or quarter, when preparing consolidated reports (often in a tool like Syft, Fathom, or even a well-structured spreadsheet), you post a single journal entry to remove the intercompany activity. This entry does not happen inside QuickBooks or Xero; it happens in your consolidation layer.

The elimination entry is simple:

1. Debit the Intercompany Revenue account for the full amount of the internal sale.
2. Credit the Intercompany Expense account for the same full amount.

This transaction has a net-zero effect on the group's bottom line. To visualize this, imagine the US sales entity has a P&L showing $100,000 in external revenue and a $50,000 intercompany expense. The UK development entity shows £50,000 (assuming a 1:1 exchange rate for simplicity) in intercompany revenue. Without elimination, total revenue looks like $150,000. The elimination entry subtracts the $50,000 of intercompany revenue and adds back the $50,000 intercompany expense. The final consolidated P&L correctly shows only the $100,000 of revenue from external customers and the true group-wide profit.

SaaS Best Practices: Setting Up a Defensible Intercompany Billing Process

Doing the accounting correctly is half the battle. The other half is ensuring your internal billing process is defensible and efficient, especially as you scale from Seed to Series B. This is where transfer pricing becomes essential for any multi-entity accounting SaaS setup.

Establishing a Simple Transfer Pricing Policy

As noted, both US and UK tax authorities require related party transactions to be priced at 'arm's length', meaning the price is similar to what you would charge an independent third party. For most pre-seed to Series B startups, the reality is more pragmatic: you need a simple, defensible policy, not a hundred-page report from a Big Four firm.

A common, defensible starting point for a transfer pricing methodology for internal SaaS services is 'Cost-Plus'. This method calculates the internal price based on the costs incurred by the service-providing entity plus a reasonable markup. A typical markup might be 10-15%. For example, if the UK development entity’s costs for maintaining the platform (a portion of salaries, hosting, tools, etc.) are £100,000, you could charge the US sales entity £110,000 (£100,000 cost + 10% markup).

Creating a Basic Intercompany Agreement

To formalize this, you should create a simple intercompany agreement or transfer pricing memo. This does not need to be overly complex. A one or two-page document covering the following is often sufficient at this stage:

• Parties: Clearly state which entities are involved (e.g., UK Parent Co. and US Subsidiary Co.).
• Service Description: Describe the service being provided (e.g., 'License for the use of proprietary software platform and related R&D support').
• Pricing Methodology: State that you are using a Cost-Plus methodology and specify the markup percentage.
• Calculation: Show the high-level calculation (e.g., 'Total development department costs for the period plus a 15% markup').

This simple documentation provides the logic for your internal charges, demonstrating to tax authorities that you have a reasoned and consistent policy. It transforms an arbitrary number into a defensible business practice.

Practical Takeaways for Scaling SaaS Companies

For an early-stage SaaS founder or finance lead managing a growing group structure, getting intercompany accounting right is about building a solid foundation. It prevents misleading metrics, reduces tax risk, and streamlines your financial operations.

At the Seed stage, awareness is key. Start by setting up separate 'Intercompany' accounts in your Chart of Accounts in QuickBooks or Xero. Begin the practice of recording internal transactions cleanly from day one. For a Series A or B company, implementation becomes critical. You must have a documented transfer pricing policy, even a simple 'Cost-Plus' memo, and a reliable process for posting elimination entries during your month-end close.

What founders find actually works is focusing on simplicity and defensibility. You do not need a complex system. You need a clear process that separates internal from external revenue, a simple memo explaining why you charge what you charge internally, and a clean consolidation process. This approach ensures your reporting is accurate, your tax position is sound, and you can close your books on time to provide the insights your board and investors expect. For more detailed guidance, see the hub on intercompany eliminations.

Frequently Asked Questions

Q: Why can't I just invoice for $0 or $1 between entities?

A: Invoicing for a nominal amount fails the 'arm's length' test required by tax authorities like the IRS and HMRC. It can be seen as an attempt to shift profits to a lower-tax jurisdiction, exposing your company to audits, penalties, and tax adjustments. A defensible transfer pricing policy is necessary.

Q: At what stage should my SaaS startup implement a formal transfer pricing policy?

A: You should establish a policy as soon as you have transactions between related legal entities in different tax jurisdictions. While a simple one-page memo may suffice initially, this should be in place from the first intercompany invoice to demonstrate intent and create a consistent record.

Q: Does this elimination process apply to intercompany loans as well as revenue?

A: Yes, but the accounting is different. Intercompany loans create a receivable on one entity's balance sheet and a payable on the other's. These must also be eliminated during consolidation so that the group balance sheet does not show the company owing money to itself. The same principle applies to any intercompany balance.

Q: What's the difference between intercompany and intracompany transactions?

A: Intercompany transactions occur between two separate legal entities under common control (e.g., a parent and its subsidiary). Intracompany transactions occur between two divisions or departments within the same single legal entity. Intracompany transactions do not require elimination as they are already contained within one company's accounts.