Creating a credit note: when and how?

 

What is a credit note?

A credit invoice, also known as a credit note, records which part of a previous invoice is cancelled. Do you need to draw up a standard invoice first? Then view the example and explanation of how to create an invoice. You refer to the original invoice and clearly show the amount, including the corresponding VAT, that you are correcting. Together, the original invoice and the correction form the overview of what the customer ultimately owes. A credit note does not yet involve returning money to the customer. If the original invoice has already been paid, you record separately whether you are making a refund or applying an agreed settlement. If it has not yet been paid, the credit note reduces the outstanding amount.

When do you issue a credit note?

• You have billed too many hours or too high a price.
• The customer is returning goods and is entitled to a refund.
• After invoicing, you agree on a price reduction.
• An assignment is cancelled in whole or in part and the previously invoiced fee lapses.
• You have accidentally invoiced the same delivery twice.

Only credit the amount that is actually being reduced. You can correct an original draft invoice that has not yet been issued before sending it. For an invoice that has already been issued, the change must remain traceable for you and the customer. According to the rules for supplementary invoices and credit notes can a separate correction document together with the original invoice constitute the correct invoice.

A client who doesn't pay is a different situation

Do not issue a credit note to reduce the amount owed simply because of a late payment. First determine whether the invoice needs to be amended substantively or whether you still require payment. For VAT on bad debts, there is a separate refund scheme. A correction in your accounting software is not automatically a commercial waiver of the debt to the customer.

Example: partially crediting an invoice

In this fictitious example, you have invoiced 8 hours of consultancy work at €85. The invoice amounts to €680 plus €142.80 VAT: a total of €822.80. Following consultation, you are granting a price reduction to the value of 2 hours. You are creating the following credit note. You fill in the fields between square brackets with the actual details. The amount remaining after the correction is € 822.80 − € 205.70 = € 617,10. If nothing has been paid, the customer can pay this remaining amount. If €822.80 has already been paid, the customer has overpaid by €205.70. State on the credit note how you will handle that amount.

What changes in the event of a full credit note?

If the entire invoice becomes invalid, in this example you credit €680 excluding VAT and €142.80 VAT: a total of €822.80. This makes the remaining invoice amount zero. If you subsequently have to create a new invoice for other work, give it its own new number and ensure you do not book the same correction twice.

Creating a credit invoice in five steps

1. Determine the reason and the amount. Keep the agreement about the discount, return or cancellation. Check whether you need to issue a partial or full credit note.
2. Pull out the correct original invoice. Check the customer, invoice number, dates and VAT treatment. Make sure the documents cross-reference each other: state the original invoice number on the credit note and also record the associated credit note number with the original invoice. Keep the originally sent version.
3. Create a separate document. Use a unique number from a sequential series and an appropriate current issue date. Clearly state ‘Credit note’ at the top of the document and reference the original number.
4. Fill in the correction rules. State which amount or fee is cancelled and the corresponding VAT. In the case of a standard price reduction, you reverse the correct original VAT treatment. If, however, the VAT treatment was incorrect, have it corrected substantively.
5. Send and process the credit note. Send the customer the correction document. Check the remaining outstanding amount and record any refund or agreed settlement separately.

On a credit note, negative amounts are a clear way to show the reduction. Avoid making both quantity and rate negative: minus times minus makes plus. In the example, only the quantity is negative and the hourly rate remains €85.

Set off or refund?

Use a short, unambiguous explanation appropriate for the payment status:

• Original not yet paid: ‘This credit note reduces invoice 2026-044 by €205.70. The remaining amount to be paid is €617.10.’
• Original fully paid: ‘You have already paid invoice 2026-044. We are refunding € 205.70 in accordance with our agreement of [date].’
• Settlement agreed: ‘As agreed on [date], we will offset € 205.70 against invoice [number]. After offsetting, a balance of € [amount] remains on it.’

First check whether there are already partial payments, previous credit notes or refunds. A credit note must not be both refunded and deducted again from a subsequent invoice. Keep the proof of payment with the processing.

How do you process the VAT on a credit note?

In the case of a retrospective price reduction, you process the corresponding VAT refund in the tax period in which the reduction takes place. For standard domestic turnover at 21% or 9%, the correction reduces the relevant turnover and VAT in section 1a or 1b. Therefore, that is not automatically the period of the original invoice. In the example, the price reduction is € 170 and the VAT correction is € 35.70. Process those amounts once in the accounts. The Tax authorities explain the return for price reduction.An error in a previously submitted VAT return may require a different correction route. Then check whether a VAT supplement is required. In the case of the small businesses scheme (KOR), exempt turnover, reverse charge mechanisms or foreign transactions, you do not blindly copy the 21% from this example.

Have you received a credit note yourself?

Then check whether you have deducted the VAT on the original purchase invoice. If the final compensation becomes lower and you have deducted too much input tax, you must correct that deduction. The Tax and Customs Administration describes when you have to repay previously deducted VAT.

Keep your records consistent

Keep the original invoice, credit note, appointment and any proof of payment together. You must be able to explain later why the invoiced amount changed and what amount was actually received or refunded. Check before you VAT return whether both the correction and the payment status have been processed correctly.

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