What is a credit note and why it does not replace the cancellation of an invoice

If you run a business, whether as a legal or natural person (sole trader), you must issue a tax document when you supply goods or services (or when you receive payment before delivery). One type of tax document is an invoice. The legislation on invoices is dealt with in Sections 71 to 74 of Act No. 222/2004 Coll. on value added tax as amended (hereinafter abbreviated as “VAT”).

A credit note is linked to the invoice issued and is a corrective tax document in which the supplier reduces the amount of the invoice that he has already invoiced and dispatched.

What is a credit note?

A credit note is a document (invoice) on the basis of which the originally issued invoice is corrected. The supplier reduces or completely cancels a previously billed receivable from the customer. For example, due to a claim or return of goods.

What is an annotation

A debit note is a corrective invoice (tax document) by which a supplier increases a previously settled receivable from a customer. For example, due to overwork or other change where the amount on the invoice needs to be increased. Thus, it serves to increase the price of the goods or services on the invoice.

A debit note is the opposite of a credit note.

The taxpayer who issued the original invoice shall issue a tax copy and only if it is necessary to correct the tax base due to an increase in the price of the goods or services.

When is a credit note issued?

The issue of a credit note applies only to VAT payers. Non-payers of VAT use cancellation invoices. Credit note is an established term in business, but you would look for it in the law in vain, officially, according to the legislation, credit note is referred to as: “taxbase correction document“.

Generally, the VAT payer issues a credit note in the following cases:

• claim for services or products – all or part of the amount is reduced
• cancellation of the supply of services or products – e.g. in the event of a wrong order
• additional price reduction – if you decide to give an additional discount

Who issues the credit note?

A credit note is issued by the taxpayer who issued the original invoice, and a credit note cannot be issued in cases other than those mentioned above (e.g. if a taxpayer issues an invoice that contained incorrect data, in which case the original invoice must be corrected and no credit note issued).

From the law on “credit”

According to § 25 par. 1 lit. (a) and b) the credit note shall be used to correct the taxable amount for the supply of goods or services and for the domestic acquisition of goods from another Member State when:

• the total or partial cancellation of the supply of goods or services,
• full or partial return of the delivery of goods (e.g. due to a claim),
• a reduction in the price of goods or services after the tax liability has arisen (e.g. due to additional discounts or bonuses).

What if the customer has not paid the invoice?

If the customer has not paid the invoice, a credit note under Section 25 of the VAT Act is not issued.

The problem is that you, as the VAT payer, have to pay VAT on the invoice. In this case, however, it is possible to proceed according to § 25a para. 1 of the VAT Act, where the taxable amount for the supply of goods or services can be paid by the payer who is liable to pay tax on this supply according to § 69 par. 1 of the Act, if after the tax liability has arisen, the customer has not paid him wholly or partially for the supply of goods or services and his receivable from this supply has become irrecoverable pursuant to Section 25a(1) of the Act. 2 of the Value Added Tax Act.

VAT refunds on irrecoverable debt

From 1 January 2021, the content of the control statement and the lines of the tax return will change. In this section on the amendment to the VAT Act, we are going to deal with the changes that will be related to the correction of the tax base after the new VAT Act, as well as the novelty of the correction of the tax on the irrecoverable receivable.

Credit note for receivables?

Credit notes may not be issued by businesses for the purpose of reducing revenue or VAT on an unpaid invoice, for example. From 1 January 2021, according to the amendment to the VAT Act, entrepreneurs can issue a credit note to invoices on the basis of which they register uncollectible receivables in order to be refunded the VAT they have paid on the invoice.

What law defines a credit note?

The credit or correction of the tax base is contained in Section 25 of Act No. 222/2004 Coll. on value added tax as amended.

As mentioned above, you would be hard pressed to find the word “credit note” or “debit note” in this law (it is not there). Credit note is just a popular name and it expresses the term: “correction of the tax base“.

How to issue a credit note?

A credit note is issued in the same way as an invoice and most accounting systems have the ability to directly generate a credit note from an invoice.

What must the credit note contain?

The credit note must comply with the following:

• must state in the title that it is a correction of a document. It must therefore contain the word credit note or tax base correction document;
• must contain the credit note serial number
• the credit note contains, like the invoice, the identification data of the taxable person and of the recipient of the goods or services
• date of delivery – date of issue – due date
• must include the invoice number to which the repair relates;
• must include the goods or services to which the refund relates
• amounts on the credit note are marked with a minus symbol,
• the same tax rate must be applied as on the invoice to which the credit note relates

A credit note, like an invoice, does not have a precise form or visual format, only the elements it must contain.