Search for intercompany payments and every result explains the accounting. Reconciliation, elimination, transfer pricing, which ERP module to configure. All of it is correct and all of it describes one half of the transaction.
Every payment between two of your own companies has two legs. There is the booking leg, which the accountants own, and there is the settlement leg, where the money physically moves. The second one costs cash every time it runs, and almost nobody writing about this topic prices it. We are a payments provider rather than an accounting vendor, so that is the half we are going to take seriously here.
What counts as an intercompany payment
An intercompany payment settles a transaction between entities inside the same group. The flows come in three directions: upstream from a lower-tier entity to a higher one, downstream from parent to subsidiary, and lateral between entities at the same level. The underlying transactions are the ordinary business of running a group: sales of goods and services between subsidiaries, intercompany loans, transfers of intellectual property, cost sharing on joint projects, management and administrative charges, and royalty payments for using group IP.
Every one of those creates a receivable in one company and a payable in another. Sooner or later, somebody actually pays.
Why the payment leg gets expensive faster than you expect
The first thing to understand is that the problem does not scale with the number of companies you own. It scales with the number of pairs between them.
Bilateral pairs grow faster than entities
Add entities and the relationships multiply rather than add. A five-entity group generates up to 20 bilateral intercompany pairs, and every pair that settles externally triggers CHAPS or BACS payments, FX conversions and bank charges that erode working capital. Nothing about that is exotic. It is the arithmetic of owning more than two companies.
This is also why the topic is not reserved for multinationals with a treasury department. As one Deloitte advisory partner put it in a review of intercompany practice, "I have seen companies with 10 or fewer legal entities that have major problems". If you run a holding company, two trading subsidiaries and a property entity, you are already in scope.
What each external leg costs
Put a price on a single settlement and the picture sharpens. A single CHAPS transaction can cost between 20 and 35 GBP, and each eliminated transaction removes not just that fee but the FX spread and the settlement timing loss from money sitting in transit. Twenty bilateral pairs settling monthly through that rail is a four-figure annual bill for moving your own money between your own companies, before a single currency conversion.
The operational cost is worse than the fee. The recurring failure pattern in multi-entity finance teams is settlement friction from multiple small payments, varying bank fees and complex approval chains, which slows cash movement and leaves unnecessary intercompany cash sloshing around, generating more reconciliation lines to clear at month end. Each settlement you avoid is a fee saved and a line item nobody has to explain.
Netting: the standard fix and what it really requires
The textbook answer is netting, and it is a good answer. Netting is the process of offsetting mutual payables and receivables between subsidiaries so the group settles only the net balance through a single payment instead of executing multiple gross bilateral transfers.
Bilateral netting pairs two entities and offsets what they owe each other. Multilateral netting runs three or more entities through a central netting centre, and the compression is significant: four subsidiaries settling gross create 12 potential payment pairs, while multilateral netting through a treasury centre executes just four net settlements.
Now the honest part, which the treasury platform vendors tend to underplay. Netting is a process, not a purchase. It requires a common settlement cutoff, agreed FX rules, a base currency and somebody who owns the cycle. Those are precisely the disciplines that break first in a growing group. The usual culprits are data mismatch, where two subsidiaries use different service names or prices for the same work so the invoice never matches the counterparty's expectation, and timing differences, where one entity posts in March and the other in April. Netting on top of that mess produces a net number nobody trusts.
Fix the master data and the cutoff first. Then net.
The paperwork half: invoices, arm's length pricing and elimination
The booking leg still matters, and it matters for a reason worth stating plainly: the invoice is not administration, it is evidence.
The mechanics are consistent everywhere. Intercompany transactions are identified, recorded in both entities' books at fair market value, and then eliminated in the consolidated financial statements so revenue and assets are not double counted. Fair market value here is the arm's length principle, and it is not a convention invented by accountants. HMRC states it directly: transactions between connected parties should be treated for tax purposes by reference to the profit that would have arisen if the same transactions had been executed by unconnected parties, a principle endorsed by the OECD and enshrined in Article 9 of its Model Tax Convention. Where actual terms differ from arm's length terms, the profits get recalculated.
Big-4 practice frames the whole thing as a single framework whose parts fail together: transaction management, data management, netting and settlement, intercompany pricing, reconciliation and elimination, and governance and policies. Read that list next to the section above and the dependency is obvious. Sloppy settlement makes reconciliation harder, and weak master data makes both worse.
The UK line most groups do not know they are on
Here is the part almost nothing ranking for this phrase tells a UK reader, and it changes how much of the above applies to you.
UK transfer pricing rules carry an exemption. TIOPA10/S166 provides an exemption from transfer pricing rules for the vast majority of transactions carried out by a business that is a small or medium sized enterprise. The thresholds are a modified version of the European definition: small means a maximum of 50 staff plus under one of 10 million EUR annual turnover or 10 million EUR balance sheet total, and medium means a maximum of 250 staff plus under one of 50 million EUR turnover or 43 million EUR balance sheet total, with the limits applied to the whole group where the entity is a member of one.
Two caveats, both load-bearing. The exemption does not apply to transactions with a related business in a territory that has no UK double tax treaty containing an appropriate non-discrimination article, and HMRC may issue a transfer pricing notice to a medium sized enterprise that removes the exemption for that period.
And the wider caveat: being outside the transfer pricing rules is not being outside the rest of company and tax law. You still have to record the transaction, still have to eliminate it on consolidation, and still have to be able to show what a payment between your companies was for. This is general information rather than tax advice, and the thresholds turn on facts about your group that only your adviser can see.
Design the account layer so most legs never leave
Everything above treats the external settlement as fixed and then tries to reduce how often it happens. Netting reduces the count. There is a prior move, which is to change what "external" means for your group.
If your entities hold their balances inside one account structure rather than across separate banking relationships, a payment from one entity to another is an internal book transfer rather than a rail transaction. On our own platform that is exactly how it prices: dedicated IBANs across 16 or more currencies reaching SWIFT, SEPA, FPS, BACS and CHAPS, internal transfers free, no monthly fee for UK-incorporated entities and no minimum balance, with SEPA and UK Faster Payments at 0.99 GBP, international SWIFT at 26.40 GBP, and FX at 0.70 percent on majors and 0.90 percent on minors. Intercompany transfers between your entities settle instantly with the invoice generated alongside them, and the ledger reconciles into Xero.
Be clear about the boundary. Consolidating the account layer removes settlement cost and settlement delay. It does not eliminate balances, produce consolidated accounts, price a transaction at arm's length, or forecast your liquidity. If you need those, you need an accountant and possibly treasury management software, and we have written honestly elsewhere about when that spend is actually justified. What the account layer does is shrink the surface those systems have to cover, which is worth doing first because it is cheaper and it makes everything downstream smaller.
The compliance position, stated exactly. Regulated payment services are provided by Gemba Finance Limited, FCA FRN 804853, UK customers only. EXFI is a trading name of EX Financial Solutions Ltd, which is not itself authorised or regulated by the FCA and acts as a distributor of those services. These are payment accounts, not bank accounts; funds are not covered by the FSCS but are safeguarded in segregated accounts in accordance with the Payment Services Regulations 2017. If that distinction is new to you, it is worth understanding what an authorised payment institution is before you centralise group cash anywhere, and worth knowing which number a payment actually needs when the flow genuinely is external.
Start with the pairs. Count how many of your monthly settlements are between companies you own, price what each one costs on its current rail, and you will usually find the answer is not a better process for paying yourself. It is a multi-currency business account structure where most of those payments were never external in the first place.
FAQ
Can my companies transfer money to each other without an invoice? The money can move, but the transaction still has to be identified, recorded in both entities' books at fair market value and eliminated on consolidation. An undocumented transfer does not remove that work, it just leaves it undone, and it creates a reconciliation item and an evidence gap instead of a clean audit trail.
What is the difference between intercompany netting and cash pooling? They solve different problems and are often confused. Netting reduces the number of external settlements by offsetting payables against receivables before any payment executes. Cash pooling concentrates liquidity to optimise interest, either notionally by calculating interest on aggregated balances, or physically by sweeping subsidiary accounts to a master account. Groups commonly run both.
Is withholding tax due on intercompany payments? It can be. Intercompany royalties, interest and similar payments create withholding tax exposure across jurisdictions, which is why cross-border intercompany flows are designed with tax input rather than settled first and explained afterwards. That is general information, not tax advice.
Is money held in a payment account protected the same way as a bank account? No, and the difference is worth knowing before you concentrate group cash. EXFI accounts are payment accounts, not bank accounts. Funds are not covered by the Financial Services Compensation Scheme; they are safeguarded in segregated accounts under the Payment Services Regulations 2017. The regulated payment services are provided by Gemba Finance Limited, FCA FRN 804853, for UK customers only.