Set-off

What it means

A set-off extinguishes a receivable and a payable without money moving: two parties who owe each other set the claims against one another up to the smaller amount, and only the difference is paid.

The conditions are mutuality and eligibility - the claims must be of the same kind and generally due. A unilateral set-off is possible, but the declaration must reach the other party.

Even a time-barred claim can be set off if it could have been set off before the limitation period ran out. What matters is the moment both claims first met as eligible for set-off. By contrast, a claim that is not yet due cannot be set off unilaterally by the other side.

How it works in practice

In practice a written set-off agreement names the specific documents and amounts. That document is an accounting document and is matched in the sub-ledger on both sides.

Set-off saves transfer costs and time but changes nothing in the tax treatment: VAT is accounted for exactly as if payment had been made. Nor does it change the original due date of whatever was not set off.

A construction s. r. o. is due a final payment from the client, who sets a contractual penalty for delay off against it. The contractor books the full invoiced amount as revenue and the penalty as a separate cost; the VAT base does not change, because a penalty is not a price discount.

What to watch out for

An undocumented set-off is as much of a problem in an inspection as a payment with no document. Take care with set-off against a company in bankruptcy or restructuring - special restrictions apply there and a unilateral step may be ineffective.

The company does not pay its income tax because it is waiting for a VAT refund and assumes the two will cancel out. On the taxpayer’s personal account, however, the overpayment is used only once the deduction has been verified and is refundable, and until then late-payment interest runs on the unpaid tax. Settling up with the state is not a set-off the company can make itself.