VAT on intercompany recharges in the UK is usually not due when both companies sit inside the same VAT group, because supplies between group members are disregarded. Two situations break that default: a disbursement that fails the agent test, and a section 43(2A) intra-group charge on bought-in services. Before posting any recharge, confirm the VAT-group status of both entities and the real nature of the cost being passed across.

TL;DR:

  • A recharge qualifies as a disbursement only when the recipient received and owed the supply, you acted as agent, and you passed on the exact cost.
  • When any disbursement condition fails, the recharge becomes a taxable supply, so charge 20% VAT and issue a standard VAT invoice.
  • Section 43(2A) can impose VAT when externally purchased services pass between members and support an external supply; calculate the charge on the cost used.
  • A holding company receiving only dividends cannot recover input VAT just because it joins a VAT group; taxable management services require evidence and cost apportionment.
  • A UK company receiving business services from an overseas group entity generally accounts for UK VAT itself under the reverse charge, separately from section 43(2A).
Priceandaccountants
Keep Intercompany VAT Compliant
Price & Accountants provides VAT management and tax guidance for growing businesses navigating complex intercompany recharges.
Visit Price & Accountants

Table of Contents

How VAT grouping normally treats intra-group recharges

When two or more UK companies register as a single VAT group, HMRC treats them as one taxable person for VAT purposes. That means most supplies of goods and services between members are disregarded for VAT: no VAT invoice, no output tax, no input tax claim on the recharge itself. The representative member files one VAT return for the whole group and carries the practical burden of accuracy, though HMRC can pursue any member for the group’s VAT debt.

The disregard is not absolute. A few things routinely defeat it:

Finance teams in growing tech groups often assume grouping once one subsidiary joins, without checking that every recharging entity is formally inside the same registration. That assumption is the most common cause of VAT errors we see.

Disbursements versus recharges: the agent test and VAT treatment

Not every recharge is a VAT-neutral pass-through, even outside a VAT group. HMRC’s disbursement guidance sets a four-part test, and all four conditions must be met for a cost to qualify:

  1. You acted as the agent of the recipient when paying the third party, not as the party actually using the service.
  2. The recipient, not you, was the one who received and used the goods or services.
  3. The recipient was responsible for paying the third party, and you simply advanced the cost.
  4. You passed on the exact amount paid, with no mark-up and no bundling into your own fee.

Common examples include recharging an employee’s MOT fee paid on a group director’s behalf, or passing through an insurance premium taken out in another entity’s name. Recharging a share of office rent, software licences or staff time against a management services agreement almost never meets the test, because the paying company is the actual recipient of the underlying supply.

When the test fails, the recharge is treated as part of a taxable supply in its own right. Standard-rate VAT at 20% applies, and the recharging company must issue a normal VAT invoice.

Pro Tip: Keep a one-line note against every recharge explaining which disbursement condition would fail if challenged. It saves hours during a VAT inspection.

Section 43(2A) intra-group charge and the intra-group reverse charge

A supply that would normally be disregarded inside a VAT group can still attract VAT under section 43(2A). This applies where one group member buys in services from outside the group and those bought-in services are then used to make an onward supply to another group member, which in turn uses them to make a supply outside the group.

Key features of the charge:

Groups that buy in consultancy, marketing or technology services centrally and pass the benefit through other entities are the most exposed to this charge, and the calculation is easy to miss because no VAT invoice is raised internally.

Recovering input VAT for holding companies and group members

Input VAT recovery turns on whether a cost has a direct and immediate link to taxable supplies made by the business incurring it, not simply on whether the company sits inside a VAT group. A pure holding company that only receives dividends and does not make taxable supplies cannot recover VAT on its costs, even after joining a VAT group, because grouping does not convert a non-economic activity into a recoverable one.

Where a holding company does provide management, strategic or administrative services to subsidiaries for consideration, the position improves, but apportionment still matters:

Keep the management services agreement, time records and cost allocation methodology on file. Without them, a VAT inspector has nothing to test and will default to disallowing the claim.

Practical compliance checklist: accounting, invoicing and timing for intercompany recharges

Getting the mechanics right matters as much as getting the VAT treatment right. Work through this each time a new recharge arrangement is set up:

  1. Confirm whether the supply is disregarded (VAT group, no exception applies), a genuine disbursement, or a standard taxable supply, and invoice accordingly: no VAT on disregarded or true disbursement amounts, a full VAT invoice at 20% on taxable recharges.
  2. Check the tax point: for one-off recharges this is usually the invoice or payment date, but for recurring annual management charges with no invoice issued, HMRC’s time-of-supply rules impose a compulsory tax point of 31 December where no other tax point has arisen in the year.
  3. Review section 43(2A) exposure and the trifling threshold at least once a quarter, not just at year end.
  4. Keep a written intercompany agreement setting out the services, the allocation basis and who bears which costs.

A recharge with no written agreement and no documented allocation basis is the single most common finding in HMRC intercompany VAT reviews, based on HMRC’s own guidance on evidencing disbursements and input tax recovery.

Our practitioner perspective on recharges in tech and fintech groups

Across the tech and fintech groups we work with, the recharges that cause the most friction are staff-cost apportionments and management services agreements between a UK parent and its subsidiaries. We test these by asking what service was actually delivered, who benefited, and whether the allocation basis (headcount, time recorded, revenue share) can be reproduced from the underlying records.

We use templates to keep the VAT treatment consistent across intercompany arrangements and provide a clear audit trail if HMRC asks questions. Where a historical position looks wrong, particularly around section 43(2A) or an overseas establishment affected by the Skandia-related changes, we recommend a technical review before deciding between a correction on the next return and a formal voluntary disclosure.

Impact of cross-border intercompany recharges within multinational groups and relevant VAT treatments

UK VAT grouping only covers UK-established companies, so a recharge between a UK subsidiary and an overseas parent or sister company sits outside the disregard entirely, regardless of how the wider group is structured. The VAT treatment then depends on the place of supply of the underlying service and who is receiving it.

For business-to-business services recharged from an overseas entity into the UK, the general place-of-supply rule puts the VAT where the customer belongs, which typically means the UK recipient must self-account for VAT under the normal reverse charge mechanism. The reverse charge here operates separately from the intra-group reverse charge under section 43(2A), which only concerns bought-in services moving between members of the same UK VAT group.

Where a UK entity recharges costs out to an overseas group company, the supply may fall outside the scope of UK VAT if the place of supply is where the overseas customer belongs, but this depends on the exact service and should not be assumed automatically. Groups with a mix of UK and overseas entities should also check whether any overseas branch or establishment is treated as part of the UK VAT group, an area Revenue and Customs Brief 7 (2025) specifically addressed following the Skandia judgment. A position adopted before that update may need correcting, and in some cases there is a reclaim opportunity worth investigating. Our guide to cross-border VAT and multi-currency reporting covers the wider mechanics for groups trading across borders.

Impact of cross-border intercompany recharges within multinational groups and relevant VAT treatments — overview diagram

Handling VAT on recharges involving intangible services or digital goods within the group

Recharges for intangible services, consultancy, software licences, platform access, data processing or similar digital services, follow the normal business-to-business place-of-supply rule rather than any special digital-services regime designed for consumer sales. That means the VAT treatment hinges on where the recipient company belongs and whether both entities are inside the same UK VAT group, not on the fact that the service is delivered electronically.

Inside a VAT group, a recharge for an intangible service between UK members is disregarded in the same way as a recharge for a tangible cost, unless section 43(2A) applies because the underlying service was bought in from outside the group. This is actually one of the more common triggers for the intra-group charge in practice: a parent company licenses software or buys in a SaaS platform centrally, then makes it available to subsidiaries, which is exactly the “bought-in services used in an onward intra-group supply” scenario HMRC’s internal manual describes.

Where the recharge crosses into a cross-border intangible service, apply the general reverse charge rules discussed above rather than any consumer-facing digital goods regime, since intercompany recharges are business-to-business by definition. Document what the underlying bought-in service was, its cost, and how it was consumed by each recipient, because intangible costs are harder to evidence than a physical invoice and attract more scrutiny on review.

Specific VAT implications for tech and fintech sectors relevant to intercompany recharges

Tech and fintech groups structure intercompany recharges more often than most sectors, usually because a single entity holds the intellectual property, the engineering team or the regulated permissions, and other group companies pay a management or licence fee for access. That structure makes section 43(2A) exposure a routine, not an exceptional, issue: central teams frequently buy in cloud hosting, software tooling and professional services, then the benefit is recharged across subsidiaries.

Fintech groups with regulated entities add a further wrinkle, since some fintech activities are VAT-exempt financial services. An exempt subsidiary receiving a recharge from a group management company cannot generally recover VAT on a taxable recharge, which makes correct classification of the underlying service, exempt, taxable or disregarded, directly costly rather than just an administrative detail.

Fast-growing SEIS and EIS-backed startups also tend to restructure frequently as they raise funding rounds, add new subsidiaries or set up an overseas entity ahead of a Series A. Each restructure is a reason to re-check VAT group membership and recharging arrangements, since an entity added after the original grouping was set up is not automatically inside the group. We see this most often when a UK tech company sets up a subsidiary for global expansion and continues recharging shared services without updating the VAT group registration.

Differences in VAT treatment of cost sharing arrangements versus service recharges within the group

A cost sharing arrangement and a service recharge look similar on paper, both involve one entity bearing a cost and passing a share to others, but HMRC treats them differently. A true cost sharing arrangement, where costs are shared exactly at cost with no profit element and no separate supply of a service being made, can sometimes fall outside the scope of VAT if it meets specific conditions around exact cost allocation and genuine shared use, similar in spirit to the disbursement test but assessed on its own terms.

A service recharge, by contrast, usually involves one entity providing an actual service, management, administration, staff time, strategic direction, to another, with the recharge representing consideration for that service. This is a taxable supply in its own right (or disregarded if inside a VAT group), and the VAT treatment does not depend on whether a profit margin is included.

The practical test is whether the paying entity is simply reimbursing an exact, unmarked-up share of a jointly incurred cost, or whether it is paying for a service performed by the other entity. Management services agreements almost always describe the latter, which is why most genuine recharges inside a tech or fintech group fall to be treated as taxable supplies or disregarded intra-group supplies, rather than VAT-free cost sharing. Getting this classification wrong in either direction, treating a real service as a disregarded cost share, or over-applying VAT to a genuine joint cost, is one of the more persistent errors we see corrected on review.

Comparison of cost sharing and service recharges

Pragmatic rules for busy finance teams

Three things matter more than the detail of any single rule. Write every intercompany arrangement down, with a consistent allocation method applied the same way each period. Keep evidence of the direct link between a cost and a taxable supply, ready for an input tax claim. Re-check section 43(2A) exposure on a schedule, not only when something changes.

*— Rahamut

How Price & Accountants can help with VAT on intercompany recharges

Priceandaccountants

Getting intercompany VAT wrong rarely shows up until a VAT inspection or a funding round due diligence process, by which point correcting it costs far more than getting it right the first time. We review recharge structures for UK tech and fintech groups, draft management services agreements that hold up to scrutiny, and assess input tax recovery positions for holding companies.

Our VAT & Business Compliances service covers this work as part of a wider engagement, and our pricing page sets out the Core Services, Blue Plan and Black Plan options if you want ongoing support beyond a one-off review.

FAQ

Are intercompany transactions subject to VAT?

Intercompany transactions are subject to VAT unless both entities are inside the same UK VAT group, in which case the supply is usually disregarded. Exceptions include the section 43(2A) intra-group charge on bought-in services and cross-border transactions involving an overseas entity.

Is VAT charged on recharged expenses?

VAT is charged on a recharged expense unless it qualifies as a genuine disbursement under HMRC’s four-part agent test. If any condition fails, the recharge forms part of a taxable supply and standard-rate VAT applies.

What are intercompany recharges?

An intercompany recharge is a cost or service passed from one company in a group to another, such as shared staff time, office costs or a bought-in service like software or consultancy. Whether VAT applies depends on the VAT-group status of both entities and whether the amount is a true disbursement, a disregarded intra-group supply, or a taxable service.

How is VAT applied to recharging expenses?

If the companies are in the same UK VAT group and no exception applies, the recharge carries no VAT. If the test for a disbursement fails, or the cost falls under section 43(2A) for bought-in services used in an onward intra-group supply, standard-rate VAT is due and must be invoiced or self-accounted for correctly.