What is an offset of an invoice?
Invoice set-off is also known as deduction – this is the term we find in the Civil Code. This is a situation in which two entrepreneurs have obligations to each other. It is then possible to settle all or part of the obligation of one of the parties by reducing it to the amount of the lower claim.
EXAMPLE
- Company A has a liability to Company B in the amount of PLN 25,000.
- Company B, in turn, owes Company A PLN 11,000.
The above situation means that, as long as the representatives of both companies agree to it, the obligation of the higher amount can be reduced by PLN 11,000. As a result, Company A will have to give Company B another PLN 14,000, and Company B’s liability will be settled.
Can the offset be used in any situation?
The conditions under which deduction is possible are described in Art. 498, §1 OF THE CIVIL CODE:
When two persons are debtors and creditors to each other at the same time, each of them may set off his claim against the claim of the other party, if the object of both claims is money or things of the same quality designated only by species, and both claims are due and can be enforced before a court or other state authority.
In this short piece you will find all the most important information about the deduction, especially under what conditions it can be applied:
- the parties to the transaction must be both debtors and creditors to each other;
- both receivables included in the set-off must be due; they can also be claimed in court;
- offset is applied to the value of the lower of the claims;
- the object of both claims is money or things of the same quality.
If the above conditions are met, there is a statutory offset, in which case only statements written by each party will suffice. In these statements, entrepreneurs must emphasize their willingness to settle mutual obligations and receivables by means of offsetting.
Important!
It is possible to send a request for compensation without the involvement of the other party – in this case, company A sends all the data and the compensation proposal to company B. However, in order to avoid ambiguity and related problems, it is advisable to obtain written confirmation of acceptance of the terms of the offset from the counterparty.
Two more important elements related to offsets are worth mentioning – possible multilateralism and contractual offsets.
Multilateral offset
Nothing prevents more than two companies from agreeing to offset debts. Multilateral settlement is usually carried out on the basis of a netting agreement, which must be signed by all parties involved in the process.
Contractual offset
Although the provisions of the Civil Code must be respected when carrying out a set-off of claims, the parties themselves may determine the specific terms of the set-off. Often companies choose to write an offset agreement to avoid disputes.
Invoice offset – template
In such an agreement, the parties should include:
- enterprise data;
- the amount of the claim;
- the amount of the offset(s) made;
- the amount of outstanding debt;
- the form and timing of payment of the remaining liability;
- documents that form the basis of the deduction (e.g., invoices issued);
- signatures of company representatives.
Contract of set-off – discussion
At the top of the document traditionally should be the data of the parties, as well as the date and place of preparation of the document. Underneath this information, it is a good idea to put the title of the document (e.g.: “Contractual offset”) to avoid inaccuracies.
The main part of the contractual netting is usually a table detailing liabilities and receivables. Each item should be described with at least three pieces of information:
- the number and name of the document from which it results (e.g., a VAT invoice);
- The date of issuance of the document;
- The amount of the liability/receivable.
Under the table, summarize the total amount of payables and receivables to be offset, and summarize the remaining receivables (the amount to be paid after offset is…).
The next step is to specify what should happen to the remaining part of the liability or receivable (the part of the liability/receivable not covered by the offset will be settled by transfer/cash…) and to indicate the date of payment that both parties agree to. In this way, the offset can change the due date on the invoice.
When is it possible to make a contractual deduction?
In the Civil Code (specifically, in the already cited Article 498), we will find a detailed description of the conditions for contractual set-off. Entrepreneurs who want to enter into a contract under which they will carry out a deduction must remember that this is only possible in three cases:
- when both receivables are due – that is, the due date specified in the invoice or contract has passed;
- in the case of past due receivables, but only if it was possible to set off the receivables before the expiration of the statute of limitations;
- when the claims are seized, but only if the debtor became a creditor to his creditor before the time of seizure.
It is also worth remembering that offset can only be made against monetary claims or things whose value can be determined and is equal to the claim.
When can’t a contractual offset be made?
Not everything that businesses agree to among themselves is legal. The Civil Code also indicates cases in which offsetting of obligations is impossible, even by contract. This includes:
- unmatured receivables;
- past due receivables (except as described in the previous section);
- seized receivables (id.);
- claims for the provision of livelihoods;
- claims arising from tortious acts;
- claims excluded from offsetting under separate regulations.
Offsetting and the right to deduct VAT
Does offsetting mutual obligations have tax implications? One of the most frequently asked questions is whether offsetting affects VAT? The answer is no. Payment of invoice receivables, including by way of offsetting, does not affect the timing of the right to deduct tax, nor does it affect the right to deduct input tax. This is due to the general provisions on the right to deduct VAT.
Remember that a businessman can deduct VAT when he meets the relevant conditions – he is an active VAT taxpayer, and the goods and services he purchased are related to his business activity (he uses them for taxable activities). None of these elements are affected by the fact of offsetting.
Offset vs. accelerated tax refund
However, in the context of receiving an accelerated VAT refund, it is worth remembering that offsetting is not a form of payment through a bank account. This means that liabilities settled in this way count towards the statutory limit (PLN 15,000), thus affecting the possibility of receiving an accelerated tax refund.
Thus, if the sum of receivables settled following a set-off (offset) is PLN 15,000 or less, the taxpayer may receive a VAT refund within a preferential period not exceeding 25 days. However, if the receivables settled by way of set-off exceed the amount of PLN 15,000, the taxpayer does not have this option.
