Once a business owner has more than one company, a holding company with a trading subsidiary or two trading companies run from one office, costs start being paid by the “wrong” entity. One company employs the staff who work for both. One signs the lease. One pays for the accounting software. An intercompany recharge moves those costs to the company that benefits, so each set of accounts shows its real costs and profit.
Common recharges in small groups
| What is shared | Who usually pays | Typical basis for the recharge |
|---|---|---|
| Staff working for several companies | The employing company | Time spent, agreed percentages or hours logged |
| Office premises | The tenant company | Floor area used, or headcount |
| Software, phones, insurance | Whoever holds the contract | Users, or an agreed split |
| Directors’ and management time | Holding company | A management charge, often cost plus a mark-up |
| Head-office functions (finance, HR, IT) | Holding or service company | Shared services charge on an agreed key |
The basis should be reasonable, applied consistently and written down. The general method of choosing an allocation key is explained in shared cost allocation in bookkeeping; the difference here is that the costs cross a legal boundary, so they need an invoice and a balance between two companies.
Posting a recharge: both sides, same figure
Company A (the service company) employs an office manager costing £3,000 a month, who spends 40% of her time on Company B. Company A recharges £1,200 a month. Assume the companies are not in a VAT group and the recharge is subject to VAT at the standard rate.
In Company A
| Entry | Debit | Credit |
|---|---|---|
| Recharge invoice to B | Intercompany – Company B £1,440 | Recharge income (or management charges receivable) £1,200; Output VAT £240 |
In Company B
| Entry | Debit | Credit |
|---|---|---|
| Recharge invoice from A | Management charges payable £1,200; Input VAT £240 | Intercompany – Company A £1,440 |
Some groups credit the recharge against the original cost in Company A (wages) rather than to an income account. Either can work; choose one approach and use it consistently, because it changes what the profit and loss shows as turnover.
Intercompany balances must agree
Each company holds an intercompany account for each other group company: a debtor on one side, a creditor on the other. At every month end:
- the balance Company A shows as owed by B must equal the balance B shows as owed to A;
- recharge invoices must be posted in the same period in both companies;
- settlements of the balance (actual bank transfers between the companies) must be posted on both sides with the same date.
Differences are almost always timing or one-sided postings. Reconcile them monthly, not at the year end, when consolidation or the accountant will find them anyway. Do not net intercompany accounts against unrelated balances such as a director’s loan account.
VAT
- Not in a VAT group: a recharge between two separate VAT-registered companies is normally a supply of services and is subject to VAT like any other, even though both companies are owned by the same person. The paying company reclaims the VAT subject to the normal rules.
- In a VAT group: supplies between members of the same VAT group are generally disregarded for VAT, so no VAT is charged on the recharge. The group submits one VAT return. See VAT groups for eligibility and effects.
- Partly exempt groups (for example where one company provides insurance or financial services) need more care, because recovering VAT on costs depends on what the costs are used for.
A recharge of costs is not a disbursement for VAT purposes just because it passes on a cost at the same price. The disbursement rules apply only in narrow circumstances; see recharging costs to customers.
Corporation tax and transfer pricing
Recharges and management charges are deductible for the paying company if they are incurred wholly and exclusively for its trade, and taxable income for the receiving company. Under the UK transfer pricing rules, charges between connected companies should broadly reflect what independent parties would agree, but most small and medium-sized groups are exempt from those rules in many situations. The exemption does not cover every case, for example some transactions with overseas connected parties, so check with your accountant before setting a mark-up, particularly where one company is loss-making. Our transfer pricing guide for UK SMEs explains the exemption.
Document it
A short intercompany services agreement between the companies protects both sets of accounts. It should say:
- which services or costs are recharged;
- the basis of calculation and any mark-up;
- how often invoices are raised and when they are settled;
- that both companies’ directors approved it, with the date.
Keep the calculations behind each recharge (timesheets, floor plans, user counts) with the invoices. When HMRC or an auditor asks why Company B paid £14,400 in management charges, the agreement and the workings are the answer.