Credit Notes and Debit Notes — Mechanics

Credit Notes

A credit note is issued when a supply is reduced after the original tax invoice was issued.

When to Issue

• Goods returned by the customer
• Post-sale discount given
• Supply cancelled
• Error in the original invoice (overcharge)
• Volume rebate or loyalty discount

Requirements

A valid credit note must include:

1. Clearly marked as "Tax Credit Note"
2. Supplier name, address, and TRN
3. Recipient name and address
4. Reference to the original tax invoice (invoice number and date)
5. Reason for the credit
6. Adjustment amount (including VAT)
7. VAT amount being adjusted
8. A sequential, unique credit note number

VAT Adjustment

• The supplier reduces output tax by the VAT amount on the credit note.
• The recipient reduces input tax by the same amount (if registered).
• Both adjustments are made in the VAT return for the tax period in which the credit note is issued.

Debit Notes

A debit note is issued when the supply value increases after the original invoice.

When to Issue

• Post-sale price increase
• Additional charges added after invoicing
• Undercharge error in the original invoice

VAT Adjustment

• The supplier increases output tax.
• The recipient increases input tax (if registered).

Worked Example

A Dubai retailer sells AED 10,000 + AED 500 VAT of goods. The customer returns AED 2,000 worth. The retailer issues a credit note for AED 2,000 + AED 95.24 VAT. The retailer reduces output tax by AED 95.24. The customer (if registered) reduces input tax by AED 95.24.

If the retailer had undercharged (AED 8,000 instead of AED 10,000), they issue a debit note for AED 2,000 + AED 100 VAT. Output tax increases by AED 100.