Credit note

What it means

A credit note is a correcting document by which the seller reduces the amount originally billed: on a complaint, a return, a later discount or an error in the invoice. A debit note works the other way and increases it.

For VAT it is a correction of the taxable amount. The document has to reference the original invoice and state the difference in amount and tax - not a new total, which could never be matched against the original.

A credit note does not by itself mean money flows back. It is a document reducing the amount; whether the difference is refunded, set against the next invoice or simply lowers an unpaid receivable is a separate arrangement between the parties. With a set-off there should be a record of which documents cleared each other and for how much.

How it works in practice

A credit note reduces the receivable from the customer and is matched to the original document so the balance reconciles. In the control statement it goes into the corrections section and is matched against the counterparty’s filing.

Which period the correction belongs to follows the VAT rules on correcting the taxable amount - not the date the document was printed.

For the customer a credit note received works the other way: it reduces the cost and the input VAT deducted, in the period in which the customer received it. That is why we ask clients for their suppliers' credit notes as well as invoices. Without them the VAT deduction stays higher than the company is entitled to, and the gap shows up when control statements are matched.

What to watch out for

Cancelling an issued and sent invoice by deleting it in the system is not permissible - the number sequence has to stay unbroken. The error is corrected by a credit note and, if needed, a fresh invoice, even where the customer paid nothing.

For supplies of goods or services to another member state, a credit note also has to go into the EC sales list, not just the VAT return. If the correction is left out of the EC sales list, the figures no longer match what the customer reports in its own country, and the mismatch tends to prompt questions from the tax administrator.