What Is Intercompany Invoice?
An invoice from one company to another company in the same group, for goods, services or shared costs.
Detailed Explanation
Examples are a parent charging a subsidiary for shared IT and finance services, one subsidiary selling goods to another, or a recharge of costs paid centrally. The two companies are separate legal entities, so it is a real invoice for both: a sale for one and a purchase for the other, and it may carry VAT or GST. Because the price is set inside the group, tax authorities expect it to follow the arm's length principle, and because the group's consolidated accounts eliminate it, both companies must record exactly the same amount.
Example
A UK parent company invoices its US subsidiary for a 25% headcount share of the month's shared IT and finance costs, plus the markup set in the group's transfer pricing policy.
Why It Matters
A clear intercompany invoice shows how the price was built, which supports the group's transfer pricing position, and lets both ledgers match so intragroup balances eliminate cleanly at month-end.
Key facts
- Prices between associated companies are expected to follow the arm's length principle: the price unrelated companies would agree in comparable circumstances. The OECD Transfer Pricing Guidelines describe it as the international consensus for valuing cross-border transactions between associated enterprises.
- In the US, section 482 of the Internal Revenue Code lets the IRS adjust the income, deductions, credits or allowances of commonly controlled taxpayers to prevent evasion of taxes or to clearly reflect their income (IRS, Transfer pricing).
- For VAT, an intercompany invoice is usually treated like any other supply between businesses. In the UK, HMRC's VAT Notice 741A says business-to-business services are generally supplied where the customer belongs, so no UK VAT is charged on general-rule services to a group company that belongs outside the UK.
- Supplies between members of the same UK VAT group are normally disregarded for VAT, and HMRC's VAT Notice 700/2 lists the cases where they are not.
- Consolidated accounts eliminate intragroup income, expenses, receivables and payables in full (IFRS 10), so the seller and the buyer must book the same amount in the same currency, or the difference has to be investigated.
- The invoice records a price; it does not justify one. The analysis behind the pricing method belongs in the group's transfer pricing documentation, whose requirements differ by country. This entry is general information, not tax advice.
How it shows up in practice
Illustrative example: a US parent pays a $36,000 annual software licence used by the whole group and recharges 40% of it, $14,400, at cost to its Canadian subsidiary under their intercompany agreement. The parent's invoice quotes the agreement, the cost, the 40% user share and the subsidiary's purchase reference. The first month the subsidiary converts the invoice at its bank's rate while the parent's records use the group's month-end rate, so the two sides no longer match and the balance does not eliminate in the group accounts. From then on the invoice states the exchange rate, its source and date, both companies book the same figure, and the group's specialist confirms the cost-only recharge and the tax treatment in each country.
Common mistakes
- Invoicing without a signed intercompany agreement that sets the pricing method.
- Billing a single "management fee" line with no cost base, allocation key or markup shown.
- Letting two group companies share one invoice number series or prefix.
- Using different exchange rates in the two companies' books, so the balances do not eliminate.
- Mixing cost-only recharges and marked-up services on one line, hiding which pricing method applied.
- Leaving intercompany balances unsettled for years, when unrelated companies would expect payment on agreed terms.
Frequently asked questions
Do intercompany invoices need VAT?
Often yes, when the companies have separate VAT registrations, because the supply is between two businesses. Cross-border business services often fall outside the supplier's VAT under place-of-supply rules. In the UK, supplies between members of the same VAT group are normally disregarded and need no VAT invoice. Check the rules where each company is registered.
How do I price an intercompany invoice?
Under the group's transfer pricing policy, which should follow the arm's length principle. Methods include comparable prices, cost plus a markup and profit-based methods. Show the method and its inputs on the invoice; keep the supporting analysis in the transfer pricing documentation.
What is the difference between an intercompany invoice and a cost recharge?
A recharge passes on a cost one company paid for another, often at cost. An intercompany invoice for services or goods sells something, often with a margin. Both can be invoiced, but label them separately so each one's pricing method is clear.
Why must both companies record the same amount?
Because consolidated accounts eliminate intragroup sales, purchases, receivables and payables in full. If the seller records £12,600 and the buyer £12,000, the £600 difference does not eliminate and has to be traced at month-end.
Can InvoiceQuickly handle intercompany invoicing?
Only in a limited way. One InvoiceQuickly account invoices from one business, so each group company would need its own account, and nothing links or matches the two sides. It copies saved tax IDs into new invoice PDFs but has no dedicated company-registration-number field, and it has no netting, consolidation or ERP connection. For occasional invoices between small related companies, the intercompany invoice template is a simpler fit.
Related Resources
- Intercompany invoice template
- International invoicing guide
- Invoice tax compliance
- Reverse charge: definition
- Accounting hub
Last verified: October 2026
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