Why do we need notes?
Once an e-invoice is issued, it may not be edited or deleted. But business reality is full of changes: a customer returns part of the goods, a volume discount is granted after the sale, or a price error is discovered later. The compliant solution is to issue a separate document that adjusts the original invoice:
- Credit note: Reduces the value of the supply and its VAT, as with returns, later discounts and downward price corrections.
- Debit note: Increases the value of the supply and its VAT, as with an upward price correction or adding charges that were not included.
What must a note include?
A note is a tax document as important as the invoice. In general it must include: a sequential number and a date, the seller's and buyer's details as on the original invoice, the number of the original invoice it adjusts, the reason for issue, and the adjustment amount and its VAT. In Phase 2 of e-invoicing, a note follows the type of the original invoice: a note on a tax invoice is sent for Clearance, and a note on a simplified tax invoice is reported within 24 hours.
Worked example: three adjustments to one customer's sales
A packaging materials factory sold three invoices to a retail chain during the quarter, and then the following adjustments occurred:
| Document | Reason | Amount before VAT | VAT 15% | Effect on output VAT |
|---|---|---|---|---|
| Quarter's invoices | Sales | 50,000 | 7,500 | +7,500 |
| Credit note 1 | Return of damaged goods | 2,000 | 300 | −300 |
| Credit note 2 | 5% volume discount on an invoice of 20,000 | 1,000 | 150 | −150 |
| Debit note | Upward price correction for an item | 3,000 | 450 | +450 |
| Net | 50,000 | 7,500 | +7,500 |
Net sales value = 50,000 − 2,000 − 1,000 + 3,000 = 50,000 SAR, and net VAT = 7,500 − 300 − 150 + 450 = 7,500 SAR. The net figures are equal here by coincidence; what matters is that each document appears separately in the records.
The effect on both parties
A note affects two returns at the same time, and its effect must match:
| Document | Seller | Buyer |
|---|---|---|
| Credit note | Reduces output VAT | Reduces the input VAT deducted |
| Debit note | Increases output VAT | Increases the deductible input VAT |
In our example, the retail chain reduces its input VAT by 450 SAR for the two credit notes, and increases it by 450 SAR for the debit note. The practical rule is that the adjustment goes into the return for the period in which the note was issued, not by amending the return for the period in which the original invoice was issued.
Mistakes that keep happening in practice
- Discounting the next invoice instead of issuing a credit note: for example, lowering the price on a new invoice to compensate for an earlier return, so the link between the return and its original invoice is lost.
- A note without a reference: a credit note that does not refer to the original invoice number, so it is rejected or hard to defend in an audit.
- A credit note larger than the original invoice: this happens when a return is recorded twice.
- Confusing trade discounts with cash discounts: a discount stated on the invoice at the time of sale is deducted before calculating VAT and does not need a note, while a discount granted later needs a credit note.
Example of a return by an individual customer
A pharmacy sold care products to a customer for 345 SAR including VAT on a simplified tax invoice. Two days later the customer returned a product priced at 115 SAR including VAT.
- Original invoice: 300 SAR before VAT + 45 SAR VAT.
- Simplified credit note: 100 SAR before VAT + 15 SAR VAT, referring to the original invoice number, with the reason “Return”.
- Net after the return: 200 SAR + 30 SAR VAT = 230 SAR.
The note is reported within 24 hours, just like the simplified tax invoice, and the pharmacy's output VAT for the period drops by 15 SAR. At the same time, the product must go back into inventory or be recorded as damaged depending on its condition, so that inventory movements match the documents.
If the pharmacy had refunded the money in cash without issuing a note, the full 45 SAR of VAT would have stayed in its return even though actual sales went down, which means paying VAT on sales that did not happen. So a note is not a formality; it is what protects the business from paying too much VAT, and protects the customer from being charged an amount that is no longer due.