Identify a credit note

1. Identify a Credit Note!

2. What is a Credit Note?
A Credit Note is basically a way to ‘refund’ part or all of
an invoice previously issued or paid.
The effect is that the amount owing on your client’s
account is reduced or ‘credited’ by the value of the
credit note.

3. When is it used?
● Credit notes should be used under any of the following circumstances:
● You need to cancel or credit in full an issued invoice.
● You need to credit back part of an issued invoice.
● A client has requested a refund having returned goods previously
purchased.

4. How can you cancel it?
● If you are using excel spreadsheets, or paper for invoicing and books then that is the simplest
way to cancel an invoice.
● Complications arise, however, when you are cancelling all or part of an invoice some time later,
and you are VAT registered as it affects the VAT you have output. i.e. you will have paid VAT on
the full sale, so if you simply cancel the invoice you may later forget to include this credit to your
VAT owed.
● I would always suggest that for completeness of your records, you should always use credit
notes to cancel or part refund invoices.
● If you are using accounting software to raise invoices there is usually some degree of protection
over invoices, which will probably prevent you from altering invoices once they have been
issued. So using the credit note function will be necessary.

5. Inclusions in the Credit Note?
● It must be headed ‘Credit Note’ or ‘Debit Note’.
● You must include the value which you are reducing the original invoice by.
● It must be issued within one month of the agreement with the client to provide a partial or full credit (vital if you
are VAT registered).
● It must represent a real credit against an outstanding invoice or to a client’s account. i.e. you must not use credit
notes to temporarily reduce your sales value, for instance, just before completing a flat rate VAT return.
● Include an identifying number, and the date of issue.
● The name, address and VAT number of your company.
● The name and address of the client you are crediting.
● The description of, or the reason for, the credit note.
● The number and date of the invoice which is being partially or fully credited.
● Total net amount to be credited (excluding VAT).
● The rate of VAT and VAT amount to be credited (if applicable).
● The gross amount to be credited (including VAT if applicable).

6. How to reclaim the VAT?
On your next VAT return the amount of VAT you credited should be deducted from the total VAT you
have charged on sales in the quarter you are reporting.
For example,
VAT on sales (‘Output’ VAT) $500
VAT credited -$25
Total ‘Output’ VAT to report $475
The total sales figure you report should also be reduced by the net credit note value.

7. How to get refund?
● No, you should not use a credit note.
● In this case what you have is called a ‘Bad Debt’, and it needs to be written off in your accounts
as an expense.
● You can still reclaim any VAT which was on the original invoice but this time it is included in the
VAT you reclaim on your purchases.