Make sure your credit notes have these six items or you'll face the following consequences
It's simple. If you cancel a tax invoice, you have to issue a credit note.
You also have to claim back the VAT.
If you don't you will probably underpay your VAT and miss out on input tax deductions.
Let's have a look at what must legally be on your credit notes and the consequences you will face if you don't get it right.
But, before I cover that, let's look at why you must issue 'legal' credit notes.
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Four instances you need to issue credit notes
Section 21 and 22 of the VAT Act requires you to issue a credit note in the following instances:
If you don't issue a credit note and it's not a legal credit note, here's what can happen.
You or your customer cancel a sale;
The order changes. E.g. price or specification;
Your customer returns all or some of the goods; and
Where a discount for prompt payment or for reaching certain volumes is given.
So, to avoid any of these penalties, all you have to do is make sure your credit notes have these six items on them.
SARS can impose an administrative penalty on you, for non-compliance;
SARS will accuse you of underpaying your VAT. They'll charge you the full output tax on the invoice, and add interest from the day you should've paid it;
A corrected invoice could be seen as a second supply. So, if you cancel your first tax invoice, and don't issue a valid credit note, SARS will see the second tax invoice as a different supply. They'll want all the output tax from both invoices!
You'll miss out on some important input tax deductions. Because SARS doesn't accept anything less than a valid credit note. You won't have sufficient proof to claim your input tax deduction. So SARS will reverse your input tax claim and penalise you.
How to get your Vat documentation right – first time, every time
Did you know...that in the vast majority of cases SARS has issues NOT with your interpretation of the Act, or with fancy avoidance schemes, or even with complicated transactions, but with your documentation.
This is where the most disputes, investigations and all-out battles with the assessors arise – and the crazy thing is, it's all so avoidable.
You must get your documentation right, first time, every time.
Here's the only resource that will show you how with practical tips and explanations, checklists and actual examples of invoices and returns.
Six requirements for a legal credit note
For more details and sample credit notes you can use in your business get your copy of the Practical VAT Handbook today.
The words 'credit note' in a prominent place;
The name, address and VAT number of both VAT vendors – you and your client;
The date of issue;
The amount of the supply and the VAT;
A brief explanation of why you've issued the note; and
Sufficient information to identify the original transaction to which it refers (e.g. a reference to the original tax invoice).