Paying a supplier in part is a decision your business makes, which makes it different from receiving a short payment. You know why the invoice is not being paid in full, so the job is to record that reason, tell the supplier clearly, and make sure the outstanding amount does not get lost or paid twice.
Four situations, four treatments
Most part-payments to suppliers fall into one of these:
- Cash timing. The invoice is correct but you cannot or would rather not pay it all at once. You pay some now and the rest later, ideally under a plan the supplier has accepted.
- Holding back a disputed amount. Part of the delivery was short, faulty or not as ordered. You pay for what you accept and withhold the rest until the supplier credits it or puts it right.
- Contractual retention. The contract lets you keep a percentage until the work is complete or a defects period ends, common in construction.
- Deposit already paid. You paid on account before the invoice arrived, so only the balance is now due.
Recording the payment
Post the invoice in full, at the amount and VAT the supplier charged. Do not reduce it yourself because you intend to pay less; the purchase ledger must match the supplier’s document until the supplier issues a credit note.
Then post the payment and allocate it to that invoice. Take a worked example: an invoice for £3,000 plus £600 VAT, total £3,600. You pay £2,400 now.
| Account | Debit | Credit |
|---|---|---|
| Trade creditors (supplier) | £2,400.00 | |
| Bank | £2,400.00 |
The invoice now shows £1,200 outstanding and will sit in the right ageing bucket on your supplier payment runs. For a deposit paid earlier, allocate that payment to the invoice as well, so the account clears to the true balance.
What the remittance advice should say
A remittance that just says “£2,400” invites the supplier to allocate it however suits them, often against their oldest invoice rather than the one you meant. State:
- the invoice number and its full amount
- the amount paid now
- the amount withheld and the reason, in one plain sentence ("£1,200 held pending replacement of the two damaged units on delivery note 5521")
- when, or on what condition, the balance will be paid
Send it on the day the payment leaves. If your supplier payment runs produce remittances automatically, check the part-paid lines manually before they go.
Payment plans for cash timing
Ask before you pay late, not after. Suppliers are far more willing to agree instalments in advance than to accept them after a reminder. Confirm the plan in writing with dates and amounts, then schedule each payment so it does not depend on someone remembering.
Without agreement, a business supplier is entitled under the Late Payment of Commercial Debts (Interest) Act 1998 to claim statutory interest and a fixed compensation sum on late commercial invoices, unless your contract sets its own remedy. GOV.UK explains how statutory late payment interest is calculated. A plan agreed in writing avoids that cost.
Holding back for a dispute
Withhold only the amount actually in dispute and pay the rest on time. Paying nothing because one line is wrong tends to damage the relationship more than the issue deserves and weakens your position.
Ask the supplier for a credit note for the agreed reduction. When it arrives, post it and allocate it against the invoice; the credit note reduces your input VAT, which is the correct way for the reclaim to fall. If the supplier instead replaces the goods, pay the held amount once they arrive.
Retentions
Under a contract with a retention clause, you might pay 95% of each valuation and keep 5% until practical completion, then half of that until the end of the defects period. The full invoice is still a liability. Many businesses move the retained portion into a separate retentions payable account, so trade creditors shows what is due now and the retention shows what is due later; accounting for construction businesses shows a structure for this. Keep a list of release dates so retentions are paid when the contract says, not when the supplier finally chases.
Input VAT on what you have not paid
How much VAT you can reclaim on a part-paid invoice depends on your VAT scheme:
- Standard accounting. You reclaim the full £600 on the return covering the invoice date. If you still have not paid the supplier six months after the later of the supply date and the payment due date, you must repay the input VAT on the unpaid part. Long-running disputes and forgotten balances can trigger this.
- Cash accounting scheme. You reclaim only VAT included in what you have paid. On the £2,400 payment that is £2,400 × 20/120 = £400; the other £200 comes when you pay the balance.
When the supplier’s statement disagrees
Part-payments are the most common reason for a difference between your ledger and the supplier’s statement. The supplier may have allocated your payment to a different invoice, may not yet have posted a credit note you were promised, or may show the withheld amount as overdue with interest added. Work through these in a supplier statement reconciliation, list each difference with its cause, and send the supplier your version so both sets of books end up allocated the same way.