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Discover how Vat works with credit notes so you can avoid SARS penalties

by , 10 September 2013
Do you know when you should issue a credit note? What about dealing with Vat on credit notes? Read on to find out what these two things include so you can comply with the Vat Act and avoid hefty penalties.

The Practical Vat Loose Leaf Service explains that credit notes are issued when a sale or a supply takes place and one of the following subsequently happens to that supply (sale):

  • The sale is cancelled
  • The nature of the supply changes or varies or has been altered
  • The amount changes – this could be due to a discount for prompt payment or for reaching certain volumes
  • The goods or some of the goods are returned

Where output tax has already been declared to SARS on a sale or supply and a credit note is issued, due to any of the above reasons, it's obvious that Vat has been accounted for incorrectly, whether for too much or too little, warns the Practical Vat Loose Leaf Service.

So how can you avoid this and account for Vat on credit notes correctly?

Here's how you can manage Vat when dealing with credit notes

This is how Vat works if you issue credit notes:

If the original amount payable is reduced or cancelled, the seller can reduce the output tax declared. And the buyer must reduce the input tax by the reduction in input tax, as shown on the credit note.

In this case, you'd issue a credit note to cancel the original invoice and then issue a new tax invoice.

Please note that if details of a prompt payment discount are shown on the face of a tax invoice, it's not necessary to issue a credit note when the customer takes up the discount.

You merely reduce your output tax by the tax fraction of the discount taken. The buyer must reduce the input tax claim accordingly.

Also keep in mind that if you cancel a tax invoice before issuing it, all copies of the cancelled invoice must remain with the supplier.

Here's what the Vat implications are when you receive a credit note:

You must show the Vat amount as output tax at block 12on your Vat return. Alternatively, you could also reduce your input tax deduction with this amount.

Are there any requirements for credit notes?

Yes, credit notes must contain the following:

  • The words 'credit note'
  • The name, address and Vat number of the supplier and recipient
  • The date of issue
  • The amount of the supply and the Vat
  • A brief explanation as to why it was issued
  • Information sufficient to identify the transaction to which it refers, for example, a reference to the original tax invoice.

Now that you know how Vat works with credit notes, make sure you never get it wrong.

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I Myburgh 2013-10-17 08:18:09

HI, just a comment on the "block 12":
I've used to fill in credit note VAT in block 12 until I kept getting phone calls from different SARS officials telling me this is incorrect, any such amounts are to be "set off" against the output/input as applicable.
So, yes, the VAT Act states "block 12" but the SARS officials does not and returns are then seen as "outstanding" until you re-submit them with nothing in block 12.

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