Credit Notes: The Unseen Danger

The SARS VAT verification process is a daily occurrence for many VAT vendors. Tax invoices are uploaded with other information as requested by SARS. Tax invoices are scrutinised to ensure compliance with section 20(4) of the VAT Act. However, in some instances the document uploaded is a credit note.

Credit notes do not always receive the same attention and scrutiny as tax invoices do. In most instances, the validity of the credit note from a VAT perspective is never questioned. This can often be attributed to lack of knowledge on the part of the person processing the credit note. In fairness, the focus of VAT training, even at a rudimentary level, tends to be on the requirements of a valid tax invoice rather than the requirements of a valid credit note.

A further reason for non-compliance is that, when many of the accounting systems or packages used by businesses are configured, the requirements of a valid credit note are not considered to ensure that the credit notes issued by the system constitute valid credit notes.

Failure to issue valid credit notes could result in, among other things, much needed VAT refunds being delayed or not paid out at all.

It is therefore crucial that businesses ensure that the credit notes that are generated by their accounting system and issued to their clients, comply with the provisions of the VAT Act.

Section 21(3)(a) of the VAT Act provides that a credit must reflect the following particulars:

(i) The words “credit note” in a prominent place;

(ii) the name, address and VAT registration number of the vendor;

(iii) the name, address of the recipient. And where the recipient is a registered vendor, the VAT registration number of the recipient;

(iv) the date on which the credit note was issued;

(v) either—
(aa) the amount by which the value of the said supply shown on the tax invoice has been reduced and the amount of the excess tax; or
(bb) where the tax charged in respect of the supply is calculated by applying the tax fraction to the consideration, the amount by which the consideration has been reduced and either the amount of the excess tax or a statement that the reduction includes an amount of tax and the rate of the tax included;

(vi) a brief explanation of the circumstances giving rise to the issuing of the credit note; and

(vii) information sufficient to identify the transaction to which the credit note refers.

In most instances, credit notes issued by VAT vendors comply with the requirement (i) to (v) above. However, complying with the requirements set out in (vi) to (vii) usually poses a challenge.

Brief explanation of the circumstances giving rise to the issuing of the credit note

In many instances, credit notes issued by vendors do not provide a brief explanation of the circumstances which gave rise to the issuing of the credit note. As mentioned above, the non-compliance with this requirement can often be attributed to the configuration of the accounting system which does not allow for the brief explanation to be included on the credit note. However, in other instances, it is often due to a lack of knowledge of this requirement on the part of the person processing the credit note.

Where the non-compliance arises due to the accounting system, it would seem that the most practical solution to this problem is to insert the brief explanation in the description section of the credit note.

However, this would obviously require the person processing the credit note to be aware of this requirement.

Information sufficient to identify the transaction to which the credit note refers

The wording of this requirement does not specifically state what information is required. One could assume that the purpose of this requirement is to provide an audit trail which SARS could use to easily establish the original transaction or transactions to which the credit note relates. According to Juta¹, this could be a reference to the relevant tax invoice’s serialized number. The example of a credit note in SARS’ VAT 404 Guide² refers to “tax invoice reference”.

The question that then arises is what the vendor should do if unable to link the credit note to one specific tax invoice or transaction.

In its now withdrawn General Written Rulings³, SARS previously provided guidance on a number of scenarios relating to the issuance of credit notes.

In SARS VAT Ruling No. 7 which dealt with the return of goods in circumstances where the vendor could not determine when goods returned had been supplied because of the nature of the goods, SARS stated that where it is impossible to identify the transaction to which a credit note refers, this requirement need not be complied with.

In VAT Ruling No.209 which also dealt with the return of goods, it was stated that where it is impossible to identify the original transaction (i.e. where no serial or registration number exists), an endorsement on the credit note to the effect that “this credit note refers to sales made between x date and x date”, together with the volume of the goods returned, will constitute sufficient information to identify the transaction for purposes of this requirement.

Conclusion

As can be seen from the above discussion, the validity or otherwise of credit notes issued by vendors often pose significant tax risks for these vendors. In these tough economic times, cashflow is key and issuing an invalid credit note could result in SARS raising assessments and disallowing input tax credits claimed, together with the imposition of penalties and interest. This could also result in refunds not being paid out by SARS.

Kindly contact us should you be in any doubt as to the validity of credit notes issued by your organisation.

¹ Juta’s Value-Added Tax Revision Service 17 pg. 21-8A
² VAT 404 Guide for Vendors dated 12 December 2019 pg. 120
³ Withdrawn by BGR (VAT) No: 2 dated 1 January 2007