UAE Tax Credit Note: Examples, Formats & Benefits

A tax credit note is a financial document the supplier uses to record and account for situations like the return of goods, decreasing the value of supply, or tax. This financial document helps to reduce the VAT liability and ensure compliance with the VAT regulations. These adjustments can only be made to an existing invoice and can be used in place of a refund document. 

Issuing a credit note also ensures accurate financial accounting that ultimately benefits both the supplier and the recipient. This guide covers a brief overview of what is a credit note UAE, its impact, benefits, and examples to ensure proper compliance with the regulations. 

What is a Tax Credit Note? 

A tax credit note in UAE is a document that adjusts or reduces the amount payable on a previously issued tax invoice. It is also known as a credit invoice or negative invoice. Tax credit notes are important in compliance with the UAE VAT Laws for the accurate reconciliation of the VAT returns and building trust between the supplier and the customer.

A tax credit note reflects the changes in value or tax treatment of taxable supplies. It can reduce the VAT payable by the supplier or the input tax claimable by the customer. The key features include: 

• A tax credit note can be issued in cases of refunds, pricing errors, granting of discounts, etc. It can be issued instead of a refund document.
• It should contain the names of the supplier and recipient, their respective TRNs, the date of issuance, reference to the original invoice, adjusted taxable value, VAT amount, and a clear reason for issuance.

Tax Credit Note Example

Oasis Electronics LLC, a VAT registered entity in Sharjah supplied 20 laptops to Bright Solutions at an invoice value of AED 3000 each with a total VAT of AED 3000. Now, due to some manufacturing defects, Bright Solutions refunds 3 of these laptops. In such a scenario, Oasis Electronics LLC can issue a credit note to account for these three laptops and reduce the liability of the recipient. Thus, the supplier issued a credit note and reversed AED 450 VAT to ensure fair accounting for both the supplier and the recipient. 

When is a Tax Credit Note Issued?

A tax credit note is issued in cases where a previously sent invoice needs to be amended because of incomplete delivery, damaged goods, or discrepancies in the products or services provided. It is an acknowledgement by the seller in writing to adjust the original amount of the invoice for transparency and compliance purposes.

• Damaged or Incomplete Deliveries: Where the delivered goods are damaged or not delivered in full, the seller reduces the agreed price and issues a tax credit note to the customer.
• Customer Refunds: Where there is an overpayment of invoices fully paid, the seller may refund the excess through cash, bank transfer, or any other payment method. Credit notes are never issued by the buyers but by the sellers. 
• Wrong Invoicing: The errors of overcharging, or sending the wrong invoice would necessitate a tax credit note for correction of the error to adjust the customer's liability.
• Satisfaction Adjustment: A credit note helps the seller to return a partial or full amount, in case the buyer is not satisfied with goods and services.
• Post-Invoice Discounts: Any discount agreed upon after the issuance of an invoice is adjusted with the help of a credit note to reduce the liability of the buyer.
• Overpayments: Where the customer has overpaid, the surplus may either be refunded or kept as a credit towards future purchases. While this is not a reduction of the amount due, proper accounting ensures accurate records of the overpayment.

Key Components of a UAE Tax Credit Note

Under Cabinet Resolution (52) of 2017, a tax credit note UAE format must include the following:

• The words “Tax Credit Note” are clearly written.
• Details such as name, address, and tax registration number of the supplier.
• Details such as name, address, and tax registration number of the recipient (if registered).
• Date of issuance of the tax credit note.
• Value of supply in the original tax invoice, the revised value, the difference between the two, and the tax on that difference (in AED).
• State the reason for the issuance of the tax credit note. 
• Details of the initial invoice that is being adjusted, reduced, or eliminated. 

Tax Credit Note Format 

Here’s a  tax credit note sample in UAE in compliance with VAT regulations.

Benefits of Tax Credit Notes

Tax credit notes play a vital role in maintaining business accuracy and compliance. They help rectify errors and ensure adherence to UAE VAT regulations.

• Reduction in VAT Liability: Tax credit notes enable suppliers to reduce their VAT liability to the Federal Tax Authority (FTA). This reduction occurs due to returns, price adjustments, or other corrections to taxable amounts.
• Support for VAT-Registered Recipients: For VAT-registered recipients, tax credit notes allow a decrease in input tax, thereby reducing the recoverable VAT amount when filing returns.
• Regulatory Compliance: Proper use of tax credit notes ensures compliance with UAE VAT laws, helping businesses avoid penalties or disputes with the FTA.
• Financial Recording: Tax credit notes facilitate accurate financial records by documenting changes in taxable supplies, which is essential for smooth audits and transparent reporting.

Tax Credit Note Regulations in the UAE

The UAE VAT regulations allow the issuance of tax credit notes both in written and electronic form.

Written Form:

• A written tax credit note shall be issued on the letterhead of the supplier showing the details as prescribed above.
• Physical copies shall be provided to the recipient and one such copy shall be kept at the supplier's place as well.

Electronic Form:

E-tax credit notes are the digital versions, used widely by businesses for better record-keeping and integration into accounting systems. The FTA allows electronic tax credit notes where the following conditions are satisfied: 

• Safekeeping: The supplier shall provide for the safe storage of electronic copies in accordance with the UAE standards for record-keeping.
• Data Integrity: The electronic form must ensure the authenticity of the tax credit note and that its contents have not been modified.

Conclusion 

Tax credit notes are very important financial documents for any business operating under UAE VAT laws. They provide a systematic way of adjusting liabilities and hence compliance with the VAT regulations.

They record and account for adjustments like refund of goods, damaged goods, overpricing, or post-issuance discounts. The credit notes, when issued in written or electronic form, must be done following the guidelines prepared by FTA.