Set-off and contra charges on unpaid commercial invoices

You send a commercial invoice. The Ltd, LLP or PLC customer replies that they are deducting a contra charge, exercising set-off, or holding money against a defect, delay or earlier job. The figure they say is payable is suddenly lower than the sum on the face of the invoice. That is one of the most common ways an otherwise straightforward B2B debt becomes sticky.

This guide is general information for UK businesses, not legal advice. It focuses on England and Wales and on debts owed by limited companies, LLPs and PLCs. Sources checked on 3 November 2026 include section 110 of the Housing Grants, Construction and Regeneration Act 1996 and the Late Payment of Commercial Debts (Interest) Act 1998 (including section 5). Construction Act section 111 is referred to only in general terms because the revised legislation.gov.uk page returned an error on that date.

What set-off and contra usually mean

In everyday credit control, set-off and contra are used loosely. They usually mean the customer claims a right to reduce what they pay you by a sum they say you owe them, or by losses they say your work or goods caused. Labels do not decide the legal position. What matters is whether they have a contractual right to deduct, a cross-claim that can be set against your invoice in equity because it arises from the same or a closely connected transaction, or (in some situations) a statutory or insolvency mechanism.

Typical examples include:

• a contractual clause that allows deductions for defects, damage or incomplete work after notice and a chance to remedy;
• a cross-claim on the same project (for example alleged delay costs on the same order);
• a construction pay less notice that reduces the notified sum before the final date for payment;
• an attempt to net unrelated invoices between the same companies without a clear contractual netting right.

Unrelated historic complaints, oral assertions with no figures, or deductions that ignore a condition precedent in the contract (such as written notice within a set number of days) are weaker. Ask the customer to put each head of deduction in writing with a calculation.

Types of set-off at a high level

You do not need to name the category in your first reply. You do need to pin down the facts: which invoice lines are challenged, which sums are admitted, and what evidence supports each deduction. For insolvency, see customer in administration or liquidation.

Construction contracts: pay less notices and contra

In construction, contra charges are often framed through the Construction Act payment regime. Under section 110, a construction contract must provide an adequate mechanism for determining what payments become due and when, and a final date for payment. Where the payer wants to pay less than the notified sum, the Act requires a timely pay less notice that states the sum considered due and the basis of that sum. A late email that simply says contra without meeting those requirements may not justify withholding the notified sum.

Section 111 of the same Act (requirement to pay the notified sum / pay less notices) is cited here in general terms only; the revised legislation.gov.uk page could not be fetched on 3 November 2026, so subsection wording is not quoted. Related reading: pay-when-paid clauses and construction unpaid invoices.

If their only point is that someone further up the chain has not paid them, that is usually a pay-when-paid argument, not a valuation of your work. Handle that under the pay-when-paid guide rather than accepting an open-ended contra.

Late payment interest and cross-claims

The Late Payment of Commercial Debts (Interest) Act 1998 implies a right to statutory interest (and, via section 5A, fixed compensation) into many B2B contracts for the supply of goods or services. That interest right does not block a genuine cross-claim, and a genuine cross-claim does not automatically erase interest on any balance that remains clearly due. Section 5 allows statutory interest to be remitted in whole or part where the supplier's own conduct makes that just — a different question from whether set-off reduces the principal.

In practice, calculate interest and compensation on the undisputed principal, and keep a separate schedule for the disputed head. More detail sits in statutory interest on late commercial debts.

Disputed versus undisputed for collection

Collection partners and courts treat a live, particularised dispute differently from silence or a vague complaint. Use this split:

1. Undisputed. The customer has not challenged the work or goods, or has admitted a figure in writing. A letter before action and, if needed, partner collection or a county court claim can still make sense.
2. Partly disputed. Isolate the admitted balance. Chase that. Park the contested lines until evidence is exchanged or the dispute route (negotiation, adjudication in construction, or proceedings) narrows them.
3. Wholly disputed. If the set-off equals or exceeds the invoice and is particularised, pause hard collection on that invoice and follow when collection should pause. Pressing a partner to chase a live liability dispute usually wastes time.

Never invent a recovery rate or a fixed timeline. Debt Collection UK is an introducer only: partners collect, and recovery is not guaranteed.

What to do when set-off is raised

1. Acknowledge and request particulars. Ask for the contractual clause, each head of loss, the calculation, and supporting documents by a clear date.
2. Map admitted versus disputed lines. Update your statement so the customer can see what you still say is due.
3. Check notice conditions. Many contracts require written notice of defects or set-off within a set period. Missed notice can weaken their deduction.
4. Answer on the facts. If work was remedied, signed off, or outside the alleged defect, say so with dates and attachments.
5. Protect the undisputed balance. Send a focused reminder or letter before action for what is not in dispute.
6. Escalate sensibly. Construction disputes may suit adjudication. Other commercial disputes may need negotiation or legal advice before collection.

Documents to keep before anyone chases

Build a single pack that matches what partners expect on proof of debt documents:

• contract, terms, purchase orders and variations;
• delivery notes, completion certificates, timesheets or acceptance emails;
• the unpaid invoice(s) and aged statement;
• every set-off, contra or pay less notice and your replies;
• photos, test results or third-party reports that answer quality allegations;
• a one-page schedule: invoice total, deductions claimed, your response, undisputed balance.

That schedule is often more persuasive than a long narrative. It also shows a partner which part of the debt is ready for collection and which part is not.

Frequently asked questions

What is set-off on a commercial invoice? Set-off is a claim by your customer that they may deduct a sum they say you owe them (or that arises from the same or a related dealing) from the amount on your invoice. Contra charges are a practical label for the same idea: they reduce what they say is payable. Whether the deduction is lawful depends on the contract, the nature of their claim, and the facts.

Is every contra charge a valid defence to non-payment? No. A vague email saying they are deducting costs is not the same as a contractual right, an equitable set-off that arises from the same transaction, or a properly issued construction pay less notice. Ask for the clause, the calculation, and the documents that support each line of the deduction.

Does statutory late-payment interest stop a genuine cross-claim? No. The Late Payment of Commercial Debts (Interest) Act 1998 gives a right to interest and fixed compensation on qualifying B2B debts. That right does not wipe out a genuine cross-claim, and a genuine cross-claim does not automatically cancel interest on any undisputed balance. Section 5 can remit interest where the supplier's own conduct makes that just, which is a separate point from set-off.

How do construction pay less notices interact with contra? On construction contracts covered by the Housing Grants, Construction and Regeneration Act 1996, the payer must generally pay the notified sum by the final date for payment unless a valid pay less notice is served in time. A late or incomplete notice that simply lists contra without the required detail may not justify withholding. Section 110 (payment mechanism) was checked on legislation.gov.uk on 3 November 2026; section 111 is cited here in general terms only because the revised page could not be fetched that day.

When is the debt disputed for collection purposes? If the customer has raised a serious, particularised set-off or cross-claim that goes to the same invoice or the same project, treat that portion as disputed until it is narrowed, admitted, adjudicated or judged. Undisputed lines (for example an agreed variation or a separate PO the customer has not challenged) can often still be chased. See our guide on when collection should pause on a disputed commercial invoice.

What if the customer is in administration or liquidation? Insolvency changes the picture. Mutual dealings are often accounted for under insolvency set-off rules, and a moratorium can stop ordinary collection. Do not rely on day-to-day contractual set-off assumptions once a formal insolvency process has started; read our guide on a customer in administration or liquidation and take advice if needed.

What documents should I keep when set-off is raised? Keep the signed contract and variations, purchase orders, delivery or completion evidence, the invoice and statement, every email or notice that mentions the deduction, any pay less or withholding notice, photos or quality reports, and a running schedule that separates admitted, disputed and undisputed sums. That file is what a partner or adviser will need.

Can your partner collect where set-off has been claimed? We are an introducer, not solicitors or an FCA-authorised firm. Where a solvent Ltd, LLP or PLC owes you an undisputed invoice (or an undisputed balance after set-off is stripped out) and our partner accepts it, the fee is 15% of what is recovered, payable only when you have been paid. Recovery is not guaranteed. Live disputes usually need the claim to be clarified or resolved first.

If a trading Ltd, LLP or PLC owes you an undisputed invoice or an undisputed balance after set-off is stripped out, upload the invoice via business debt collection or read how no collection, no fee works. You can also start from unpaid invoices. The fee is 15% of what is recovered, payable only when you have been paid. Recovery is not guaranteed.