In Germany, there is often some misunderstanding around the term “credit note,” which often gets confused with “reverse invoice,” as well as “invoice correction” or “corrective invoice.” To ensure correct accounting, it is particularly important for businesses to know the difference between the terms. In this article, you will discover what a credit note is, what advantages it has, and how it differs from a reverse invoice. We will also explain how to create and record a credit note, and what small scale entrepreneurs in particular should pay attention to. Lastly, you can use our template to create a credit note yourself.

What’s in this article?

• What is a credit note?
  
• What is the difference between a credit note and a reverse invoice?
  
• What are the advantages of using a credit note?
  
• What information is a credit note required to contain?
  
• How is a credit note recorded?
  
• What must small scale entrepreneurs pay attention to?
  

What is a credit note?

A credit note or clearing credit is often defined as a type of reverse invoice. When dealing with a “normal invoice,” the party providing the service will issue an invoice for the service provided. However, a credit note is issued by the other party—the service recipient. Therefore, the credit note serves the same purpose as an invoice: the billing of deliveries or services. The only difference lies in which of the two parties issues the corresponding document. Since the credit note can replace the invoice, it can be considered an invoice within the scope of the German VAT Act. It is also recognized as such by the tax office—provided it contains the requisite mandatory information. Credit notes are used, among other things, for paying bonuses or commissions.

Section 14 of the VAT Act (Umsatzsteuergesetz, or UStG) states that there is a legal requirement for a prior agreement between both parties when issuing a credit note. If this requirement has not been met, the party receiving the service is not allowed to issue a credit note without prior consultation. Conversely, service providers are not obliged to accept a credit note without an agreement. Any issued credit notes can lose their status as an invoice if the recipient rejects the document.

What is the difference between a credit note and a reverse invoice?

There is a significant difference between a credit note and a reverse invoice. Up to 2013, a credit note could be used for its original purpose (clearing a credit), and also to correct or revoke incorrect invoices. For example, if a business invoiced another party for €100 more than it should have, a credit note for the same amount would follow accordingly. Following an adjustment to the UStG, this is no longer possible. Since then, credit notes may only be used for their original purpose—as a form of clearing credit—and an invoice may only be corrected using a reverse invoice.

The reverse invoice is also known as an invoice correction, a corrective invoice, or “commercial credit.” A reverse invoice cancels out a previous outgoing invoice, allowing a new, correct invoice to be issued after the cancellation. This process is necessary as incorrect invoices cannot be corrected manually by the recipient. Furthermore, reverse invoices can also be used for refunds—for example, in the event of incomplete deliveries of goods or complaints.

Further definitions

There is a further risk of confusion with the settlement credit note—not only with the reverse invoice. A credit note in accounting must also be distinguished from a settlement credit note—the latter formally stands for an entry on the credit side of an account. Bank credit notes, on the other hand, are incoming payments to a bank account. These also have nothing to do with settlement credit notes.

What are the advantages of using a credit note?

A credit note can be advantageous for both service providers and service recipients. In many cases, using a credit note can save time and effort when it comes to accounting. For example, if a small scale entrepreneur regularly delivers goods to a large business, the latter can create credit notes. For a business dealing with lots of invoices, this means quicker and more efficient operations, because it takes less effort to automatically create credit notes than to check and process the small scale entrepreneur’s incoming invoices manually. The credit note process is often used to build a long-term business relationship, which can result in planning security for both parties.

In the above example, the small scale entrepreneur is relieved of bureaucratic burdens, because they do not have to issue an invoice themselves. Furthermore, the accelerated process means that they can receive their money more quickly. This advantage also makes credit notes an attractive alternative for freelancers, commercial agents, or people who receive commissions, among others. Credit notes are all the more attractive since they do not pose any risks: it only becomes an actionable invoice if it is not rejected. Therefore, a credit note offers the same level of control as an invoice. Additionally, neither the issuer nor the recipient of a credit note need to concern themselves with the prospect of any negative consequences from the tax office.

What information is a credit note required to contain?

Since a credit note is considered equivalent to an invoice from a tax perspective, it must contain all the legally required information in accordance with Section 4 of Article 14 of the UStG. Some specific points are worth noting, however: instead of “invoice,” the document must be clearly labeled as “credit note.”

Credit notes must contain the following mandatory information:

• The express term “credit note”
  
• Name and address of the service provider
  
• Name and address of the service recipient
  
• Tax number or value-added tax (VAT) identification number
  
• Credit note issue date
  
• New serial invoice number
  
• Service or item description (type, scope, time)
  
• Net, gross, and total amount (note: the amount of a credit note is always positive)
  
• Tax rate and amount
  
• Optional: any special agreements regarding time of payment or other details of the credit note
  
• Optional: a note stating that the retention requirement also applies to a credit note
  

To ensure you do not forget to include any mandatory information, use our template when creating a credit note.

How is a credit note recorded?

Service providers, or the recipients of a credit note, can record them in the same way as an invoice. Revenue is thus recorded as a net amount, as well as the corresponding VAT. Service recipients, or the issuers of a credit note, should record these as “external services input tax” and “deductible input tax.” Any sales tax included can be claimed as input tax during input tax deduction. Consequently, the credit note is not considered an exception when it comes to VAT. The requirements for an input tax deduction for a credit note are listed in Section 2 of Article 14 of the UStG:

• The recipient of the credit note must be entitled to a separate statement of VAT.
  
• Both parties must have agreed on the credit note process.
  
• The credit note must contain all required mandatory information.
  
• The credit note must have been delivered to the recipient.
  

What must small scale entrepreneurs pay attention to?

Anyone who receives a credit note as a small scale entrepreneur under the definition of Section 1 of Article 19 of the UStG should check it thoroughly: does it include VAT? If you, as a small scale entrepreneur, are not allowed to display VAT on your invoices and are therefore not entitled to deduct input tax, you are also not permitted to accept a credit note with VAT. Should this scenario arise, the credit note with VAT should be rejected as quickly as possible. You can request a credit note without VAT at the same time. This is only valid for small scale entrepreneurs.

Should a credit note contain incorrect information about VAT, the question of who owes the tax office the incorrectly reported VAT is contentious. According to law, the issuers of the credit note are liable. However, the recipients can also face prosecution if they have appropriated the credit note. For example, this scenario would arise if you expressly accept the credit note, sign it, or have stated that you are entitled to deduct input tax before agreeing on the credit note process.

For further detailed information on business invoicing, visit the Stripe resource portal. If you have any questions about credit notes, reverse invoices, other related topics, or if you would like support with your financial processes, please contact our sales team.