Concept Definition
What is a credit note?
A credit note is a commercial document issued by a supplier to a buyer that reduces the amount owed on a previously issued invoice. It is used to correct overcharges, process returns, or apply discounts after invoice issuance. In VAT systems, a credit note also adjusts output and input VAT previously declared.
How does a credit note affect VAT?
A credit note reverses the VAT originally charged on the invoice it references. The supplier reduces output VAT by the credit amount. The buyer reduces input VAT by the same amount. Both parties must record the credit note in the period it is issued.
- Supplier: Reduces output VAT declared. May need to amend VAT return if credit is for a prior period.
- Buyer: Must reduce input VAT claimed. Failure to do so is a VAT error.
- Reference: Credit note must reference the original invoice number.
Frequently Asked Questions
- Is a credit note the same as a refund?
- No. A credit note is a document that reduces a financial liability. A refund is a cash payment. A credit note may be followed by a cash refund, or it may be applied against future invoices. They are separate events and must both be recorded correctly.
- What fields must a credit note contain?
- A compliant credit note must include: the word 'Credit Note', a unique sequential number, the date, reference to the original invoice, supplier and buyer details including VAT numbers, the credit amount, the VAT rate and amount being reversed, and the reason for the credit.