If your organisation practises the fine art of inter-company charging, I have only one word of advice – stop it, now. This activity is often simply an exercise in robbing Peter to pay Paul. It neither adds any value nor throws additional light on where the costs in your business really lie.

Inter-company charging is sometimes necessary for tax purposes. However, if UK companies are part of a group, they are taxed as a group in any case. And most of the other reasons for such accounting tricks just don’t add up.

Many groups that have inter-company charges do so in order to hide the true cost of running their head office. These businesses pick some arbitrary method – I have seen companies use measures such as the level of sales – and proceed to parcel out their HQ costs to various divisions or subsidiaries according to their size.

Yet this slicing and distribution of costs is just a make-work scheme for bookkeepers. In essence, head office is actually punishing a subsidiary company for doing business. These charges cannot be controlled by those who have to put them into their profit-and-loss account – the same people who are constantly being exhorted by head office to control and reduce their expenditure. If you’re foolish enough to complain about the cost of the services you receive, then you are, in effect, declaring war on head office.

Inter-company charges are also a drag on the soundness and integrity of the organisation’s financial reporting systems, charges that are shoved around the weak management controls.

More importantly, various unlucky companies in the group then have to take a write-off for charges that they may or may not deserve, thus lowering their reported profits (on which, of course, may depend bonuses) and their estimation in the eyes of the main board.

Inter-company charges can turn into a nasty political football. One company had a three-day close after each month-end. If you wanted to make an inter-company charge for the period, you had to do so within that three day window. IT kit; unfortunately, the central IT department didn’t have sufficient budget in hand, so, despite the fact that it would eventually recharge the purchase to the receiving department once the project was finished, the expenditure and the project was delayed. The charges were being used as a control when what was needed was a simple approval process.

However daft and arbitrary they are, inter-company charges should not be confused with proper accounting for group resources used by another entity in the group. If, for example, one company in the group asks the IT department to write some lines of code for its database management system, then the resources consumed in terms of the programmer’s costs and equipment used should be properly recharged. But the charge is being re-allocated to where the decision and the cost of that decision in the same place.

Similarly, if a group does have shared resources, then it should be asked to pay a price for the proportion of the resources which it consumes – provided, of course, it can chose to use less of those resources and thus reduce its charge. One current client of mine is exploring charging for the reports that head office produces for other parts of the group.

The volume and complexity of requests for these reports has grown, putting pressure on the department responsible for producing them. If a realistic charge is made for these reports, then those requesting them will place greater value on the information. If they don’t see the value in the data, they can simply cancel the order.

I can guarantee you one thing, though: any system my client does eventually come up with will be rooted in commercial reality, and certainly not in some arcane and random cost allocation – and it won’t create an administrative nightmare.