Recording recharges between group companies

Q: How does each company post the charge?

CompanyDebitCredit Charging company (management charge)Amounts owed by group undertakingsManagement charge income; output VAT if applicable Charging company (cost recharge)Amounts owed by group undertakingsRecharge income or the original cost account; output VAT if applicable Receiving companyExpense account describing the service; input VAT if applicableAmounts owed to group undertakings The receiving company should code the charge to the nature of what it bought where that is known, such as insurance or rent, rather than to one "group charges" line. That gives management accounts that compare with a standalone business and makes the tax computation easier. For the charging company, crediting a cost recovery back to the original expense line makes the costs look smaller. FRS 102 paragraph 2.96 says income and expenses should not be offset unless the standard requires or permits it. Where the company provides a service, the charge is income and is shown gross. Netting against cost is only defensible where the company has simply paid a bill on another's behalf. Settlement is a separate entry. When cash moves, the paying company debits amounts owed to group undertakings and credits bank, and the receiving company does the reverse. Many groups never settle in cash and let balances build, which is acceptable as long as both sides are recorded and agreed.

Q: What does a worked example look like?

Illustration only. A parent company employs the group finance team at a cost of £120,000 a year. Its two subsidiaries have 30 and 10 staff, and the agreement allocates finance costs by headcount with no margin. The companies are not in a VAT group. Subsidiary A is charged £90,000 plus VAT and Subsidiary B £30,000 plus VAT for the year, invoiced monthly. The parent posts each month: debit amounts owed by Subsidiary A £9,000 (£7,500 plus £1,500 VAT), credit management charge income £7,500, credit output VAT £1,500, with the same pattern for B. Subsidiary A posts: debit accountancy costs £7,500, debit input VAT £1,500, credit amounts owed to parent £9,000. At the month end the parent's receivable from A and A's payable to the parent should both be £9,000 higher than last month.

A recharge between group companies is recorded as a cost in the company receiving the service and as income or a cost recovery in the company providing it, with the other side of both entries going to an intercompany balance. Each company keeps its own books, so the charge needs an agreed basis, an invoice from the charging company and a monthly check that both sides show the same amount in the same period.

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Is it a management charge or a recharge of costs?

The two are often confused, and the difference affects how they are posted.

A management charge is a fee for services the charging company provides, such as finance, HR, IT or directors’ time. It is income of the charging company, often calculated as cost plus a margin.
A recharge of costs passes on a specific cost one company paid that relates to another, such as a group insurance policy, a shared software licence or an employee on one payroll who works for a sister company. It is usually at cost.

For VAT, the word “recharge” has a specific meaning. HMRC’s guidance on costs or disbursements passed to customers says a payment is only a disbursement, outside your own supply, if every one of a list of conditions is met, including that you paid as your customer’s agent and the customer received and used the goods or services. Costs your business incurs itself and then itemises on an invoice are recharges, and VAT must be charged on them whether or not you paid any VAT. Within a group, most recharges fail the disbursement test because the charging company contracted with the supplier.

How does each company post the charge?

Company	Debit	Credit
Charging company (management charge)	Amounts owed by group undertakings	Management charge income; output VAT if applicable
Charging company (cost recharge)	Amounts owed by group undertakings	Recharge income or the original cost account; output VAT if applicable
Receiving company	Expense account describing the service; input VAT if applicable	Amounts owed to group undertakings

The receiving company should code the charge to the nature of what it bought where that is known, such as insurance or rent, rather than to one “group charges” line. That gives management accounts that compare with a standalone business and makes the tax computation easier.

For the charging company, crediting a cost recovery back to the original expense line makes the costs look smaller. FRS 102 paragraph 2.96 says income and expenses should not be offset unless the standard requires or permits it. Where the company provides a service, the charge is income and is shown gross. Netting against cost is only defensible where the company has simply paid a bill on another’s behalf.

Settlement is a separate entry. When cash moves, the paying company debits amounts owed to group undertakings and credits bank, and the receiving company does the reverse. Many groups never settle in cash and let balances build, which is acceptable as long as both sides are recorded and agreed.

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How should the basis of the charge be set?

Write it down before the first charge is raised. A short intercompany services agreement should say which services or costs are covered, how each is allocated, whether a margin is added, how often invoices are raised and when they are payable.

For corporation tax, section 54 of the Corporation Tax Act 2009 allows a deduction only for expenses incurred wholly and exclusively for the trade. HMRC’s Business Income Manual at BIM38230 says that where a group service company incurs management expenses such as a central payroll, officers may accept their being recharged to group members on a reasonable basis, for example by number of employees, so each company bears the costs relating to its own trade. It also says such arrangements should normally only be investigated where one company incurs costs for another outside the scope of UK tax, and points to the transfer pricing code in Part 4 of the Taxation (International and Other Provisions) Act 2010. See whether transfer pricing applies between UK companies.

Common allocation keys are headcount, turnover, floor area and time records. Pick the key that tracks what drives the cost, apply it consistently and keep the working with the invoice.

Is VAT charged on the recharge?

It depends on whether the companies are in the same VAT group. Section 43 of the Value Added Tax Act 1994 says any supply of goods or services by a member of a VAT group to another member is disregarded. Inside a VAT group the charge is still posted in both ledgers, but with no VAT.

Outside a VAT group, the charging company is making a supply and VAT is normally due on it. The receiving company can reclaim that VAT subject to the normal rules, so a fully taxable group loses nothing, but a group member with exempt income may bear a real cost. Our pages on management charges and VAT and VAT group registration cover the detail.

How are the two sides kept in agreement?

Most intercompany differences start with recharges, because one side is posted from an invoice and the other from a calculation. Practical controls:

The charging company raises a proper invoice, or a VAT invoice where VAT applies, and sends it before the month end close.
Both companies post in the same month, at the same amount, to dedicated intercompany accounts for each counterparty.
Late charges are accrued by the receiving company rather than left for the next month.
Balances are confirmed between the companies every month, with one side treated as the lead.

The full process of matching and resolving differences is covered in intercompany reconciliations.

How do recharges show in the accounts?

In each company’s own balance sheet the balances sit under the headings that Schedule 1 to the Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008 gives for amounts owed by group undertakings, within debtors, and amounts owed to group undertakings, within creditors.

Related party disclosure is often not needed. FRS 102 paragraph 33.1A says the disclosures in paragraph 33.9 need not be given for transactions between two or more members of a group, provided any subsidiary that is a party to the transaction is wholly owned by a member. Where a subsidiary has outside shareholders, the recharges are disclosed.

In consolidated accounts the charges disappear. FRS 102 paragraph 9.15 requires intragroup balances and transactions, including income and expenses, to be eliminated in full. Paragraph 1A.21 confirms that a small parent is not required to prepare consolidated accounts at all; see group accounts exemptions.

What does a worked example look like?

Illustration only. A parent company employs the group finance team at a cost of £120,000 a year. Its two subsidiaries have 30 and 10 staff, and the agreement allocates finance costs by headcount with no margin. The companies are not in a VAT group.

Subsidiary A is charged £90,000 plus VAT and Subsidiary B £30,000 plus VAT for the year, invoiced monthly.
The parent posts each month: debit amounts owed by Subsidiary A £9,000 (£7,500 plus £1,500 VAT), credit management charge income £7,500, credit output VAT £1,500, with the same pattern for B.
Subsidiary A posts: debit accountancy costs £7,500, debit input VAT £1,500, credit amounts owed to parent £9,000.

At the month end the parent’s receivable from A and A’s payable to the parent should both be £9,000 higher than last month.

What mistakes come up most often?

Charging without any written basis, then working out an allocation at the year end.
One company posting the charge and the other never receiving the invoice.
Leaving VAT off a recharge between companies that are not in a VAT group.
Posting all intercompany items to one account, so balances with different companies cannot be agreed.
Treating the recharge as a disbursement when the charging company signed the contract with the supplier.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.