Why B2B set-off matters for treasury
In business-to-business relationships, it is not uncommon for a partner to be both customer and supplier at the same time: a distributor buys components and sells finished products to the same manufacturer, or two group companies invoice each other for reciprocal services. In these scenarios, receivables from customers and payables to suppliers coexist on the same commercial current account.
Set-off — in Swiss law often referred to as compensazione or set-off — allows reciprocal positions to be extinguished partially or fully without moving cash. For an SME, the benefit is immediate: fewer bank transfers, lower banking fees, leaner working capital and a clearer view of net exposure to each counterparty.
Operating without internal rules, however, exposes you to accounting errors, disputes during audit and tax risks, especially regarding VAT. This guide explains the differences between legal set-off, conventional set-off and multilateral netting, with references to the Code of Obligations (CO) and typical accounting practices of Swiss SMEs.
Legal set-off, conventional set-off and netting: what's the difference
The three mechanisms share the same objective — reducing net exposure — but differ in legal origin, scope of application and operational complexity:
| Aspect | Legal set-off (CO) | Conventional set-off | Multilateral netting |
|---|---|---|---|
| Legal basis | Art. 120 and 124 CO — applies by law if the requirements are met | Agreement between the parties, even tacit, defining conditions and limits | Netting contract between multiple parties or clearing platform |
| Counterparties | Bilateral — same persons as debtor and creditor | Bilateral — typical in recurring customer-supplier relationships | Multilateral — multiple parties, single periodic balance |
| Eligible claims | Homogeneous (obligations of the same kind), due and legally set-offable | As agreed — may include future or disputed claims with specific clauses | Defined by the master agreement — often only certain and mature claims |
| Form | Notice of set-off to the creditor (Art. 124 CO) | Written notice, periodic set-off agreement | Calculation of net balance on agreed valuation date |
| Prevalence in SMEs | Very common — set-off on individual invoices | Common — monthly or quarterly balance with strategic partner | Rare — sectors with complex supply chains or groups |
| Main risk | Non-homogeneous or non-due claims — ineffective set-off | Lack of accounting traceability and VAT documentation | Contractual complexity and dependence on agreed schedule |
Requirements for legal set-off under the CO
Art. 120 CO provides that when two persons are simultaneously debtor and creditor of each other, their reciprocal claims are extinguished by set-off if they are homogeneous (obligations of the same kind), due and legally set-offable. Art. 124 CO governs the effects: set-off takes place only if the debtor notifies the creditor of the intention to rely on it; once effected, the claim and counterclaim are deemed extinguished from the moment both became set-offable.
Homogeneous and due claims
Set-off requires that both claims be of the same nature (typically monetary obligations) and already due, unless otherwise agreed. As a rule, claims not yet due or subject to a suspensive condition are excluded; however, under Art. 120 para. 2 CO, the debtor may declare set-off even if its own claim is disputed.
In B2B practice, this means waiting for invoices to fall due or verifying that there are no pending credit notes, goods returns or formal disputes before proceeding — even though the law in principle allows set-off to be asserted against disputed claims.
Limits and special cases
Not all claims lend themselves to legal set-off: exceptions include, among others, maintenance claims, salary claims and certain claims against the tax authorities (Art. 125 CO). In bankruptcy or insolvency proceedings (moratorium, composition agreement), set-off is subject to the rules of the Federal Act on Debt Enforcement and Bankruptcy (DEBA/SchKG; Art. 213 et seq.) and Art. 123 CO.
A contractual set-off agreement can expand or restrict the possibilities compared with legal set-off, provided it does not violate mandatory provisions — useful for defining schedules, minimum thresholds and treatment of disputed claims.
Accounting in Swiss SMEs
Under Swiss accounting standards (FER / Swiss GAAP FER), set-off does not eliminate the obligation to record the underlying transactions. Each sales and purchase invoice must be booked separately; set-off is a subsequent event that reduces receivables and payables towards the counterparty.
Simplified example. SME Alpha invoices CHF 11'000 (VAT 8.1% included) to supplier-customer Beta and receives an invoice for CHF 7'000. After mutual verification, the parties set off CHF 7'000. Alpha records partial collection of the receivable from Beta and partial extinguishment of the payable, with a net receivable balance of CHF 4'000.
| Transaction | Typical account | Debit | Credit |
|---|---|---|---|
| Invoice issued (gross) | 1020 Receivables / 3200 Revenue / 2200 VAT payable | 11'000 | — |
| Invoice received (gross) | 4000 Expenses / 1170 Input VAT / 2000 Payables | — | 7'000 |
| Set-off CHF 7'000 | 2000 Payables / 1020 Receivables | 7'000 | 7'000 |
| Net balance collected | 1020 Bank / 1020 Receivables | 4'000 | 4'000 |
In the balance sheet, receivables and payables towards the same counterparty should not be presented on a net basis unless the criteria for balance sheet offsetting are met (legal right and intention to offset, current nature). When in doubt, gross presentation is the more prudent choice for SMEs subject to limited or ordinary audit.
Impact on liquidity and working capital management
Cash flows
Set-off reduces outgoing and incoming bank transfers. The effect on net liquidity is nil if both items would have been settled in full; it becomes relevant when one party would have paid before collecting from the other.
DSO and DPO
Days sales outstanding (DSO) and days payable outstanding (DPO) may appear artificially improved if set-off replaces actual payments. Monitoring net exposure by counterparty separately avoids underestimating insolvency risks.
Credit limits and exposure
A set-off claim should not be confused with a collection: for decisions on new orders or increased trade credit, assess net balance and payment history, not invoiced volume alone.
VAT: traceability and reporting
Set-off between commercial receivables and payables does not change the obligation to invoice with VAT on the underlying transactions. Each invoice issued and received must appear in the VAT register with taxable amount, rate and document number. Mere accounting set-off does not replace tax documentation for individual supplies.
In the case of partial set-off, VAT remains calculated on each original invoice. If set-off is carried out via credit note or controlled reversal, the formal requirements for invoice correction must be observed (VAT Act Art. 27 para. 4). For international transactions with EU counterparties, verify VAT treatment separately — Swiss internal B2B set-off does not apply to cross-border claims unless specific agreements exist.
Retain the set-off agreement or set-off declaration signed by both parties: during an audit, the Federal Tax Administration (FTA) may request reconstruction of the link between set-off invoices and accounting entries.
Recommended operational procedure
A structured workflow reduces errors and internal disputes between administration, treasury and management accounting:
- 1
Identify bilateral counterparties
Extract from the ERP the list of partners with simultaneous receivable and payable positions. Flag those with net balance above an internal threshold (e.g. CHF 1'000) for periodic review.
- 2
Reconcile open items
Compare invoices, credit notes, advance payments and partial payments. Exclude disputed or not yet due positions. Share a reconciled account statement with the counterparty before set-off.
- 3
Formalise the set-off
Draft a set-off declaration or net balance agreement referencing invoice numbers, gross amounts, valuation date and residual balance. Obtain written confirmation from the counterparty's authorised representative.
- 4
Record in accounting
Post the set-off to receivable and payable accounts with a traceable description. Residual net balance: bank transfer or collection referencing the set-off document. Update the payment schedule and net exposure by counterparty.
- 5
Archive and review periodically
Attach documentation to the tax and accounting file (10-year retention). Review set-off clauses in existing framework contracts quarterly and update internal policies if partners or volumes change.
Risks, contractual clauses and best practices
Include a set-off clause in B2B commercial contracts defining: net balance frequency, currency, treatment of default interest, exclusion of disputed claims and applicable law. In relationships with group companies, also verify transfer pricing implications and intra-group documentation.
Avoid setting off invoices from different tax periods without clear documentation: this complicates VAT reconciliation and the auditor's work. Do not use set-off to "collect" doubtful receivables from suppliers in financial difficulty: if the debtor is in insolvency proceedings, specific rules apply and set-off may be challenged under Art. 214 DEBA.
Quick checklist for administration
- ✓Each underlying invoice is recorded separately with correct VAT
- ✓Set-off receivables and payables are due and not disputed
- ✓Written counterparty confirmation exists with reference to documents
- ✓Residual net balance is tracked in treasury and the payment schedule
- ✓Net exposure by counterparty is monitored for credit decisions
- ✓Documentation is archived for at least 10 years
Integrated accounting software such as Accountex facilitates receivable-payable reconciliation by counterparty, recording of set-offs with audit trail and monitoring of net exposure — reducing the risk of duplicate payments or "ghost" open items that weigh on working capital without reflecting the economic reality of the B2B relationship.