Credit notes in the UAE: returns, price fixes and cancellations

Three situations that call for a credit note

A credit note reduces what a customer owes you and records why. It corrects the past in the open instead of rewriting it. Three everyday situations call for one: goods that come back, a price or quantity that was wrong on the invoice, and a service that was billed and then cancelled. Ask your accountant about less usual cases, such as a discount agreed after the invoice went out.

• Returned goods: the customer sends back some or all of what was delivered
• Price or quantity correction: the invoice charged more than was agreed
• Cancelled service: the work was billed but will not now be done

Why an issued invoice should not be edited

After an invoice is sent, the customer keeps a copy. If you change yours, the two no longer match and nobody can say which is right. A credit note leaves the original untouched and adds a dated correction beside it, so anyone reading the books later sees both documents and the reason. If the customer still needs an invoice for the right amount, raise a new one after the credit note.

Link the credit note to the original

Create the credit note from the invoice it corrects, so the two documents point to each other. That link lets your accountant trace a correction in seconds, and it keeps the customer account honest: the invoice, the credit and the payments all sit together. In TAQNIX ERP, a credit note is created against the original invoice, so the link comes with the document.

Write a short, plain reason on every credit note, for example "two units returned, wrong model". A reason written on the day is accurate; one reconstructed months later rarely is. Agree with your accountant how credit notes are numbered and approved, and who in your team is allowed to issue them.

A worked example in AED

For example, take an invoice of AED 1,000.00 for 10 units at AED 100.00 each. VAT at 5% is AED 50.00, so the invoice total is AED 1,050.00. The customer then returns 3 units. The credit note is for 3 units at AED 100.00, which is AED 300.00, plus AED 15.00 VAT, a total of AED 315.00. These figures are illustrative, not a price list.

• Original invoice: AED 1,000.00 plus AED 50.00 VAT, total AED 1,050.00
• Credit note for 3 units: AED 300.00 plus AED 15.00 VAT, total AED 315.00
• Sale after the credit: AED 700.00 with AED 35.00 VAT, total AED 735.00

How the balance and the VAT summary follow

Once the credit note is confirmed, the customer balance falls by its total. In the example, a customer who has not paid now owes AED 735.00 instead of AED 1,050.00. One who already paid AED 1,050.00 has AED 315.00 in credit, which you can refund or set against the next invoice, as you agree with them.

The VAT summary follows the same documents. In the example, VAT on the sale becomes AED 35.00 after the credit instead of AED 50.00, which is 5% of AED 700.00. Look at the customer statement after each credit note to confirm the balance, and ask your accountant how the credit is reported in your VAT return.

The rules are the FTA's

What a credit note must show, when one may be issued and how it appears in a return are rules set by the Federal Tax Authority (FTA), not by software. Check them with the FTA or your accountant. TAQNIX ERP issues invoices with 5% VAT and credit notes in Arabic and English. Use this short check before you send one.

• The reason is written on the credit note
• It is linked to the original invoice
• Amounts and 5% VAT come from the system, in AED with two decimals
• The customer balance and statement have been checked