A Practical Guide for Foreign-Owned UK Companies
Foreign-owned UK subsidiaries often incur costs on behalf of the wider group or receive services from their overseas parent.
These costs may include:
- Group software and technology
- Insurance
- Finance and accounting
- HR and payroll
- Marketing
- Legal and professional services
- Head office costs
- Shared employees and administrative expenses
The group may then recharge some or all of these costs to the UK subsidiary.
The UK company needs to account for these recharges correctly and consider Corporation Tax, VAT, transfer pricing and supporting documentation.
What Is an Intercompany Recharge?
An intercompany recharge occurs when one group company incurs a cost or provides a service and charges another group company for its share.
For example:
Foreign Parent → pays group software costs → UK Subsidiary
The foreign parent may initially pay the supplier and then recharge the UK subsidiary for the portion relating to the UK business.
Alternatively, the UK subsidiary may pay a cost on behalf of another group company and recharge that company.
The accounting treatment should reflect who actually benefits from the cost and what the underlying transaction represents.
How Should the UK Subsidiary Account for a Recharge?
Where the recharge relates to a genuine business cost of the UK subsidiary, it would normally be recorded as an expense in its accounts.
For example:
Foreign Parent recharges UK subsidiary £10,000 for group software
The UK subsidiary may record:
Dr Software / IT expense £10,000
Cr Intercompany payable £10,000
The exact accounting classification depends on the nature of the underlying cost.
The UK company should avoid simply posting all group recharges to a generic “management fees” account. The accounting should accurately describe the underlying expense.
Is the Recharge Deductible for Corporation Tax?
Potentially.
A recharge may be deductible where the underlying cost is incurred wholly and exclusively for the purposes of the UK company’s trade, subject to the normal Corporation Tax rules.
The UK company should be able to demonstrate:
- What service or cost it received
- Why the UK business benefited
- How the amount was calculated
- Why the recharge is commercially reasonable
- That appropriate supporting documentation exists
HMRC recognises that reasonable group recharges can be appropriate where a group service company incurs costs on behalf of group members.
How Should the Recharge Be Calculated?
The calculation should reflect the benefit received by the UK company.
Common allocation methods include:
| Cost | Possible allocation basis |
| Payroll | Number of employees |
| Software | Number of users |
| Office costs | Headcount or floor space |
| Insurance | Relevant business exposure |
| Marketing | Revenue or actual usage |
| Finance services | Transaction volume or appropriate allocation key |
There is no single allocation method that applies to every type of cost.
The method should be reasonable, consistent and supported by the facts.
Transfer Pricing
Where the UK subsidiary and the overseas company are connected, transfer pricing may apply.
The UK company should consider whether the amount charged is consistent with the arm’s-length principle.
HMRC’s guidance confirms that transfer pricing applies to services between connected companies and requires consideration of whether a service has actually been provided and what an arm’s-length price would be.
For centrally provided group services, HMRC also recognises that a cost-plus approach may be appropriate in certain circumstances.
The documentation should therefore explain both:
- What the UK company received, and
- How the amount charged was calculated.
VAT on Overseas Intercompany Recharges
VAT is an important consideration where the recharge comes from an overseas group company.
If the overseas company is supplying services to the UK subsidiary, the reverse charge may apply.
Where the conditions are met, the UK company accounts for UK VAT as if it had supplied the service itself. It may normally recover the VAT as input tax, subject to the normal recovery rules.
For example:
US Parent → £20,000 service recharge → UK Subsidiary
If the reverse charge applies, the UK company may need to include the relevant output and input VAT in its VAT return.
For a fully taxable business, the two amounts will often offset.
However, businesses that cannot recover all their input VAT may have an actual VAT cost.
What If the Recharge Is Just a Cost Recovery?
A common mistake is assuming that a recharge has no VAT or transfer pricing implications because the parent is simply recovering the exact amount it paid.
The treatment depends on the underlying transaction.
For example, if the parent purchases software for £10,000 and then provides access to the UK subsidiary, the group should consider what is actually being supplied and whether the recharge represents a service or another type of transaction.
The accounting description “cost recharge” does not determine the tax treatment.
Practical Example
A foreign parent pays £100,000 for group-wide software.
The UK subsidiary represents 20% of the group’s usage.
The parent therefore recharges £20,000 to the UK subsidiary.
The UK company should retain:
- The original supplier invoice
- The allocation calculation
- The intercompany invoice
- Evidence supporting the 20% allocation
- Relevant transfer pricing documentation
- VAT analysis
The UK company records the £20,000 as the appropriate business expense, subject to the normal Corporation Tax rules.
If the overseas recharge is a service within the UK reverse charge rules, the UK company should also account for the appropriate VAT.
Common Mistakes
Using arbitrary allocation percentages
The recharge should have a reasonable basis.
Treating every recharge as a management fee
The accounting should reflect the actual underlying cost or service.
Ignoring VAT
Overseas service recharges can trigger the reverse charge.
Ignoring transfer pricing
Related-party transactions should be considered under the arm’s-length principle.
No supporting documentation
The group should be able to explain how the amount was calculated.
Double charging
The UK subsidiary should not be charged separately for a service that is already included in another group recharge.
Intercompany Recharge Checklist
Before recording a group recharge, the UK subsidiary should check:
- What cost or service is being recharged?
- Does the UK company actually benefit from it?
- How has the amount been calculated?
- Is the allocation method reasonable?
- Is the cost deductible for Corporation Tax?
- Does transfer pricing apply?
- Does UK VAT or the reverse charge apply?
- Is an intercompany agreement in place?
- Is the original supplier invoice available?
- Does the intercompany balance reconcile?
Frequently Asked Questions
What is an intercompany recharge?
It is a charge between group companies where one company incurs a cost or provides a service for another group company.
Are intercompany recharges tax deductible?
Potentially. The underlying cost must generally be incurred for the purposes of the UK company’s trade and satisfy the normal Corporation Tax rules.
Does VAT apply to intercompany recharges?
It depends on the nature and location of the underlying supply. Services received from overseas group companies can be subject to the UK VAT reverse charge.
Do transfer pricing rules apply?
Potentially. Transactions between connected companies should be considered under the UK transfer pricing rules where applicable.
Can a parent recharge the UK subsidiary for group costs?
Yes, provided the recharge reflects genuine costs or services benefiting the UK company and is appropriately calculated and documented.
Conclusion
Intercompany recharges are common for foreign-owned UK subsidiaries, but they should not be treated as simple accounting transfers.
The UK company should establish:
- What cost or service it received
- How the recharge was calculated
- Whether the expense is deductible
- Whether transfer pricing applies
- Whether VAT or the reverse charge applies
- Whether sufficient documentation exists
A clear recharge policy and regular reconciliation can help prevent Corporation Tax, VAT and transfer pricing issues.
How FKGB Accounting Can Help
FKGB Accounting works with foreign-owned UK subsidiaries and international groups on intercompany accounting, Corporation Tax, VAT, transfer pricing and group reporting.
To discuss your UK operations, book a meeting through our online calendar or contact us by email for a confidential consultation: David.levy@fkgb.co.uk
