The terms “invoice correction” (Rechnungskorrektur) and “credit note” (Gutschrift) are often used interchangeably, but they refer to different processes in Germany.

In this article, we’ll look at the difference between an invoice correction and a credit note and when each document is used. We’ll also discuss whether invoices and credit notes can be combined in one document.

What’s in this article?

• What’s the difference between an invoice correction and a credit note?
  
• When should an invoice correction be issued?
  
• When should a credit note be issued?
  
• Can invoices and credit notes be combined into one document?
  

What’s the difference between an invoice correction and a credit note?

Whether to issue an invoice correction or a credit note can be determined by considering the purposes of each document.

Invoice correction

An invoice correction or reverse invoice is used to amend or void an incorrect invoice. Suppliers can use it to fully or partially void previous outgoing invoices. This is a necessary step before a corrected invoice is issued to the customer. The invoice correction is also referred to as a “trade credit memo.”

A corrected invoice must have a unique invoice number and must clearly reference the original invoice being corrected, including its number and date. Invoice corrections must also include all the required details as mandated by Section 14, paragraph 4 of the UStG, the German VAT (value-added tax) Act. However, instead of using the term “invoice,” the document must be labeled as “invoice correction,” “correction invoice,” or “reverse invoice.” In addition, the original invoice amount, including sales tax, must be preceded by a minus sign, effectively reducing the amount to a negative value. The invoice line item or service description remains the same as on the original invoice.

Credit note

Unlike a reverse invoice, a credit note is issued by the recipient of the service. Like an invoice, a credit note is used to settle payments for services or supplies. The only difference between the documents is who issues them. Suppliers and service recipients can agree that the recipient will issue a credit note instead of receiving an invoice from the business. In the absence of an agreement, businesses are not required to accept credit notes.

Credit notes, like invoices and invoice corrections, must contain all the information required by Section 14, paragraph 4 of the UStG. However, the main difference is that they must be marked as a “credit note” instead of an “invoice.” The invoice amount is shown as a positive amount.

Risk of confusion

Reverse invoices and credit notes are often confused mainly because until 2013, credit notes could also be used to correct or cancel incorrect invoices in addition to their intended purpose. However, since a change in the VAT Act, credit notes can be issued only in their role as settlement credit notes. As of 2013, the only way to correct an invoice is to issue a reverse invoice.

It’s important to differentiate between reverse invoices and credit memos because they have different legal and accounting implications. They also must be handled differently for VAT purposes. The issuer of a credit note is entitled to deduct input tax. Because an invoice correction is treated as a correction for VAT purposes and often results in a payment reduction, the issuer of a reverse invoice cannot claim input tax deduction. According to Section 17, paragraph 1, sentence 1 of the UStG, the overstated VAT must be adjusted downward and the input tax deducted by the other party must also be corrected accordingly.

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Invoice correction or credit note? Differences at a glance

When should an invoice correction be issued?

An invoice correction is issued if the original invoice is incorrect. Typical scenarios are:

• Incorrect invoice amounts: An invoice correction is required when the amount on the invoice is incorrect – for example, if the invoice mistakenly lists the price of a different product. More commonly, typing or calculation errors result in incorrect invoice amounts.
  
• Incorrect or missing VAT: The VAT amount can also be a reason for needing to correct an invoice. The correct tax rates must be applied to accurately show the VAT at 0%, 7%, or 19%. A missing or incorrectly calculated sales tax must also be corrected using a reverse invoice.
  
• Incorrect invoice number: When using previously issued invoices as templates for new invoices, it’s easy to forget to update the invoice number. Because invoice numbers must be assigned sequentially, each number cannot be used more than once. If this happens, the invoice must be corrected with a reverse invoice. The same applies if the invoice issue date is incorrect.
  
• Incorrect address: The invoice must have the correct addresses for the service provider and the recipient. If the street, city, or postcode is incorrect, the invoice must be cancelled.
  
• Incomplete or incorrect service description: If the service or delivery described on the invoice is incorrect or missing important details, an invoice correction is required. However, misspellings and minor typographical errors do not require an invoice to be cancelled if the content remains accurate despite the errors.
  

As a general rule, every invoice must include and correctly present the legally required information. These details include names and addresses, the invoice number, the performance period, the invoice issue date, a description of the service, the tax number or VAT identification number, the net, tax, and gross amounts with the tax rate, and, if applicable, a reference to the small scale entrepreneur rule. If the supplying business or service recipient finds that any of these details are incorrect after invoicing, the invoice must be corrected.

However, a reverse invoice can be skipped if the invoice has not been processed by the service recipient. In this case, both parties can agree to reissue the invoice with the same number. If no payment has been made, a correction document can be used instead of a reverse invoice to add or correct missing or incorrect information. When stating the invoice number, it must clearly refer to the original invoice and should not have its own invoice number. In all cases, it is important that the supplier correct the inaccurate invoice. Invoice recipients are not permitted to change the other party’s invoices.

Reverse invoices are also necessary for processing refunds. This applies, for instance, if the business did not deliver a promised service in full or at all or if goods were not delivered or delivered incomplete. If services or goods result in a complaint because of poor quality, the corresponding invoice can also be cancelled.

When should a credit note be issued?

Credit notes are especially useful for freelancers, sales representatives, or people who receive commission payments. For example, they can receive credit notes from businesses they work with regularly. This eases the accounting burden on businesses by letting them create credit notes automatically instead of manually processing numerous individual invoices. Credit note recipients also save time because they don’t have to create invoices. Ideally, they also receive their payments faster because of the more efficient process.

The credit note procedure is also commonly used when third parties are involved. For instance, freelance copywriters who write blog posts for a public relations agency’s clients can receive credit notes from the agency, which then sends an invoice to the client.

Credit notes are also commonly used by subcontractors providing services to major businesses.

Can invoices and credit notes be combined into one document?

An invoice and credit note may be combined if the services provided and the services received are billed in a single document. The document must clearly identify who provided and invoiced each service, indicating whether it was the supplying business or the service recipient. These reciprocal services cannot be offset. A document that combines an invoice and a credit note must be identified as a “credit note.”