Credits and debits

By Tolley

The following Value Added Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Credits and debits
  • Crediting a customer
  • Valid credit / debit notes
  • Accounting for VAT shown on a credit note
  • Correction of VAT invoices following a VAT rate change

This guidance note provides an overview of how debits and credits should be dealt with from a VAT perspective.

Crediting a customer

If a supplier has agreed to issue a credit note to a customer or offers a contingent discount and the customer is able to recover all of the VAT incurred, the supplier and customer can agree to issue a credit note without VAT. If the parties do not agree that the credit note may be issued without VAT, the supplier should issue the credit note including VAT and the VAT amount should be recovered from HMRC via the suppliers' VAT return.

SI 1995/2518, regs 15 and 24; De Voil Indirect Tax Service V7.428 (subscription sensitive)

If preferable the customer can issue the supplier with a debit note. This option is commonly used if the customer has been issuing self-billed invoices (see the Self-billing guidance note for more information).

Valid credit / debit notes

From a VAT perspective a credit or debit note must meet the following conditions:

  • it is raised in order to address a genuine mistake, overcharge or agreed reduction in the value of the supply made
  • it must be issued within one month of the mistake, overcharge or agreed reduction being identified
  • it must represent a genuine entitlement or claim by the customer for the amount of the overcharge or reduction and the customer should either receive a refund or be entitled to offset the amount against a future supply
  • the following information must be shown on the credit / debit note:
    • include a reference to whether it is a credit or debit note
    • unique identifying number
    • date of issue
    • supplier's

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