The short answer: can you charge between your own companies?
Yes. There is nothing wrong with one company you own charging another for services or for the use of premises, and in a group with a holding company and one or more trades it is often the right thing to do. It keeps each company carrying its own costs, it lets you pool shared staff and overheads in one place, and it gives you a clean picture of what each trade actually makes.
The care is all in the detail. A management charge and a rent charge are taxed on completely different footings, so the sensible instinct to "just move the cost across" can create a VAT problem or a corporation tax one without you noticing. Our rule of thumb is simple: charge a management fee at a rate you could defend to a stranger, under a written agreement, with VAT added where the paying company can reclaim it, and do not charge rent between your own companies without first checking whether it creates an exempt supply that blocks VAT recovery on the building.
This guide is written by LOYALS, a King's Cross firm of accountants and business consultants that sets up and runs intercompany agreements, VAT and group bookkeeping for owner managed companies across London, so the framing is what an owner actually has to get right each month, not the textbook. The monthly numbers behind all of this come out of your management accounts, which is where an intercompany charge either reconciles cleanly or turns into a year-end headache.
What is a management charge and when does it make sense?
A management charge is one company invoicing another for services it has actually provided. In a typical owner managed group the holding company or a central services company employs the directors, runs the office, carries the software subscriptions and perhaps the senior admin staff, and then recharges the trading companies for the share of those costs they use. The charge is a real supply of services, taxable income in the company that raises it and a deductible cost in the company that pays it, provided the paying company genuinely needs what it is paying for.
It makes sense when there is something real to share. If two trades run off the same back office, a management charge puts the cost where the benefit is and stops one company subsidising the other by accident. It also helps when you want each trade to show its true profit, which matters for lenders, for a future sale, or simply for deciding which part of the business is worth your time.
Where it goes wrong is when the charge is invented to move profit rather than to pay for a service. A round number plucked out of the air at year end, with no agreement and no activity behind it, is exactly what HMRC looks for. The fee should track what the central company does: a share of directors' time, a slice of the rent and the software, the bookkeeping and payroll run centrally. Write that basis down once and bill it monthly, and the charge looks like what it is.
Do you add VAT to a management charge between your companies?
In most cases yes. A management charge is a supply of services, so if the company raising it is VAT registered the charge is standard rated at 20 percent, the same as if it were billing an unconnected customer. The paying company then reclaims that VAT in the normal way if its own activities are taxable, so between two fully taxable companies the VAT washes through and costs nothing beyond the cashflow gap and the paperwork.
The exception is a VAT group. Companies under common control can register as a single VAT group, and supplies between the members are disregarded, so a management charge inside the group carries no VAT at all. That removes the invoicing and the cashflow gap in one step, which is why groups with a lot of internal recharging often use it. The trade off is that every member becomes jointly and severally liable for the whole group's VAT, so if one company cannot pay, the others carry the debt.
The question worth settling before you set the structure is whether the companies are, or should be, in a VAT group, which removes VAT on charges between them but makes every member liable for the group's VAT. For most owner managed groups where all the companies are fully taxable, grouping is a convenience rather than a saving. It earns its place when one company cannot reclaim VAT, which is where the next section matters. If the billing company is not yet VAT registered, remember that raising management charges counts towards its taxable turnover and can push it over the 90,000 pound registration threshold.
What a charge really costs when the VAT cannot be reclaimed
Everything above assumes the paying company can reclaim the VAT. The moment it cannot, the 20 percent stops washing through and becomes a real cost. This is the trap for groups that include a company making exempt supplies, and the most common example is care. A care provider whose fees are exempt from VAT cannot reclaim VAT on what it buys, so a management charge from a sister company lands with the VAT attached and 20 percent is simply lost.
The figure below shows the gap on an illustrative 60,000 pound annual management charge. For a fully taxable paying company the real cost is the 60,000 pound fee, because the 12,000 pound VAT comes straight back. For an exempt paying company the same charge costs 72,000 pounds, because the VAT sticks. That 12,000 pound difference is the reason a VAT group, where the charge is disregarded, is often the right answer for a group that contains an exempt trade.
None of this means you avoid the charge. The cost of the central services is real and belongs with the trade that uses it. It means that when one company in the group cannot reclaim VAT, the structure around the charge, usually a VAT group, is worth getting right before the invoices start rather than after a year of lost VAT.
Can you charge rent between your own companies?
Yes, and it is common where one company owns the premises and another trades from them. Rent is a different animal from a management charge for VAT, because supplies of land and buildings, including letting commercial property, are exempt from VAT by default. So the property company charges rent with no VAT on it, and at first glance that looks simpler.
The catch is VAT recovery. If the property company's only income is exempt rent, it cannot reclaim the VAT on the building's costs, and on a refurbishment or a purchase that can be a large sum left on the table. The usual fix is to opt to tax the property, which turns the rent into a standard rated 20 percent supply and lets the property company reclaim its VAT. That works cleanly when the trading tenant can itself reclaim the VAT on the rent, and it is a problem when the tenant is exempt, because now the rent carries VAT the tenant cannot recover. An option to tax is also a long commitment: once made it normally lasts 20 years, with only a six month cooling off window at the start.
So the rent decision turns on who the tenant is and what the property company spends. The three outcomes below are the ones worth weighing before you set a rent between your companies.
There is a corporation tax side too. Rent charged at a commercial level is a deductible cost for the trading tenant and taxable income for the property company, which is usually neutral across the group but can matter if the companies pay tax at different rates or one is using losses. Holding property in a separate company also has consequences well beyond rent, for future relief on a sale and for how the group looks to a buyer, so the rent is rarely a decision on its own.
Will HMRC challenge it, and do transfer pricing rules apply?
HMRC will accept a charge that is real and reasonable and will attack one that is neither. The test it keeps coming back to is whether the cost is genuinely for the paying company's trade and whether the amount reflects what was actually provided. A management charge that matches identifiable services, billed consistently through the year, sits comfortably. A single year-end journal moving profit from a company with a tax bill to one with losses, with nothing to show for it, does not.
Transfer pricing is the rule many owners worry about and most do not meet. The UK transfer pricing rules, which force connected parties to price dealings as if they were strangers, carry an exemption for small and medium enterprises. An enterprise is broadly medium or smaller if it has under 250 staff and either turnover under 50 million euros or a balance sheet under 43 million euros, counted across the whole group, so nearly every owner managed group sits outside the rules. That is not a free pass, because the general requirement that a cost be wholly for the trade still applies, and HMRC can in limited cases direct that a medium enterprise applies the rules.
Keeping a charge defensible is not hard. Put a short agreement in place that sets out the services, the basis of the fee and how often it is billed. Bill it monthly through the bookkeeping rather than as a year-end correction. Keep the rate tied to something real, a share of actual costs or a sensible markup on them. Where companies pay different rates of corporation tax, be able to show the charge was set for a commercial reason and not to shift profit into the lower rate.
Here is how the common ways of handling intercompany charges actually compare:
| What you need | DIY / year-end journal | Generic accountant | LOYALS specialist |
|---|---|---|---|
| Sets the VAT treatment before the first invoice | ✗ You guess | ● If asked | ✓ Checked up front |
| Puts a written intercompany agreement in place | ✗ | ● | ✓ Drafted for you |
| Bills the charge monthly, not as a year-end fix | ✗ | ● Often year-end only | ✓ In the monthly books |
| Models the VAT cost where a company is exempt | ✗ | ● | ✓ Before you decide |
| Open Mon to Sat for a quick structure question | ✗ | ✗ Mon to Fri 9 to 5 | ✓ 10am to 7pm Mon to Sat |
| Fixed monthly fee, no surprise invoices | ✓ | ● Hourly billing common | ✓ Fixed monthly |
This is why owners running more than one company move from a year-end tidy up to a specialist who sets the treatment and runs it monthly.
What this means for you: what to do before you raise the next invoice
If you charge, or are about to charge, a management fee or rent between your companies, a few steps keep you out of trouble.
- Decide what the charge is actually for. List the services or the premises behind it. If you cannot describe them, the charge is not ready to raise.
- Settle the VAT before the first invoice. Check whether the billing company is VAT registered, whether the paying company can reclaim, and whether a VAT group would remove the issue.
- Treat rent with extra care. Work out whether the property company needs to reclaim VAT on the building, and only opt to tax once you have thought through the 20 year commitment and who the tenant is.
- Put a short agreement in place. One page setting out the service, the basis of the fee and the billing frequency is enough to make the charge defensible.
- Run it through the monthly books. Intercompany charges done right are a monthly bookkeeping job, not a year-end scramble, and that is where they either reconcile cleanly or unravel.
Set up properly, charges between your own companies put cost where it belongs, keep each trade honest and keep the VAT neutral. Set up carelessly, they lose VAT you could have reclaimed and give HMRC a thread to pull. The honest position is that this is a small job to get right at the start and an expensive one to fix later, which is the condition that changes our advice: the moment one of your companies cannot reclaim VAT, or a property purchase is coming, it is worth an hour with an accountant before the invoices begin. This guide is written by LOYALS, a King's Cross firm of accountants and business consultants that runs intercompany agreements, VAT and group bookkeeping for owner managed companies across London, and would rather set the treatment once than unpick a year of it.