Three companies, one client, one invoice

A client asks for a piece of work. You have three companies. Which one invoices them?

Most groups answer this the first time by picking whichever entity feels right, and then answer it again the next time, and the time after that. Nobody writes anything down. Two years later the intercompany balances don’t agree, the VAT treatment varies by invoice, and a perfectly good business has a set of accounts that takes a fortnight to explain.

This is one of the most common problems I see in multi-entity businesses, and almost all of it is avoidable with a decision made once and applied consistently.

Why do groups end up here?

Nobody sets out to make it complicated. The entities usually exist for reasons that made sense at the time - separating a risky trade from a stable one, a different set of shareholders in one company, a brand that needed its own vehicle, or an acquisition that was never fully integrated.

The trouble starts when the work stops respecting the boundaries. A client of Company A is served by people employed by Company B, using equipment owned by Company C. That’s normal, and it’s fine, as long as the money follows a rule rather than an instinct.

Which entity should invoice the client?

Whichever entity holds the contract with the client. Not whichever one has the better cash position this month, and not whichever one the account manager thinks of first.

Then, separately, the entities that contributed the work recharge the entity that invoiced. Two distinct transactions with two distinct purposes: one external, one internal.

When groups invert this and invoice from whichever company is convenient, three things follow. The revenue lands in an entity that has no contract with the client, which is difficult to defend if anyone asks. The costs sit somewhere else, so neither company shows a sensible margin. And the intercompany position has to be reconstructed later by someone reading old emails.

What goes wrong with intercompany recharges?

Not the concept - it’s the consistency. The recharge itself is straightforward: Company B did work worth a defined amount for Company A, so Company B invoices Company A for it.

Both sides have to post it. If Company B raises a recharge and Company A never records the corresponding cost, the balances don’t mirror. Do this for two years and the intercompany reconciliation becomes an archaeology project. Auditors find it immediately, and it’s usually the single largest item on a clean-up.

The basis has to be written down. Is the recharge at cost, or cost plus a margin? How is shared overhead split - headcount, revenue, floor space? Whatever you choose is likely defensible. What isn’t defensible is a different answer each time, decided by whoever was doing the calculation that month.

It has to happen on a schedule. Recharges done annually, in a rush, at year end, are recharges done from memory. Monthly is better, and it doesn’t take longer in total.

What is the VAT position on intercompany charges?

Usually the same as for any other supply. Three things catch groups out, and all three are worth checking before the invoices start rather than after.

Intercompany supplies are usually supplies for VAT. Unless the entities are in a VAT group, a recharge between two of your own companies is a supply like any other, with VAT accounted for accordingly. Shared people are the common exception: where staff are jointly employed by both companies, or where one company runs the payroll and recovers each company’s share as a paymaster, that recovery is outside the scope of VAT. Groups that treat every internal transfer as invisible tend to discover the position at a bad moment.

A VAT group changes the picture entirely. Inside a VAT group, supplies between members are generally disregarded and the group files one return. That can be simpler and can help cash flow, but it isn’t free: every member is jointly and severally liable for the group’s VAT, so HMRC can pursue any one of them for the whole debt, and grouping isn’t available to every structure.

Add an overseas entity and the place of supply rules start to bite. The answer turns on which entity actually makes the supply - where the supplier is established and where the customer belongs - not on whose name goes on the invoice. So if a UK company and an overseas company could both plausibly serve the same client, that is a decision with a VAT consequence, and it belongs with the contract rather than with whoever raises the paperwork.

I wouldn’t decide any of this from an article, including this one. It’s worth a 20-minute discovery call with someone who can look at your actual structure.

What does good look like?

Four things, none of them sophisticated.

What does it cost to leave this alone?

Not primarily tax, though there is a risk there. The real cost is that a group with tangled intercompany balances is a business nobody can see clearly, including its owners.

You can’t tell which entity is genuinely profitable, because the costs and revenue are in the wrong places. You can’t produce clean consolidated numbers quickly, because consolidating requires eliminating intercompany balances that don’t agree. Year-end takes longer and costs more. Diligence, if it ever comes, is slow and uncomfortable.

The fix isn’t complicated. It’s a decision, written down, applied the same way every time. The expensive part is only ever the two years of doing it differently - at which point it stops being a policy question and becomes a clean-up.

Ozria Consulting runs the outsourced finance function for ambitious businesses. If your intercompany balances have stopped agreeing with each other, book a discovery call.