Credit Notes vs Cancelled Invoices in South Africa

Marking an invoice as cancelled and issuing a credit note sound like the same thing. They are not. A cancelled invoice is a note in your own records. A credit note is a document you give your client, with content the VAT Act spells out. This article explains which one a mistake needs, what a credit note must contain, and where SortedNexus stops short, because our Cancel button is not a credit note and we would rather say so plainly.

Two different things

Cancelling an invoice is a status in your books. It says this invoice should no longer count, and it keeps the number and the history on file. Your client may never see it happen.

A credit noteis a tax document sent to the client. It reverses all or part of an invoice you already issued, and it is what lets both sides correct the VAT: you reduce the output tax you declared, and a VAT-registered client reduces the input tax they claimed. If you only cancel on your side, the client's records still show an invoice they are being asked to pay or have already claimed VAT on.

The rule is in section 21 of the Value-Added Tax Act, and it applies to registered vendors. If you are not VAT registered, SARS does not prescribe a credit note format for you. A credit note is still the clearest way to correct an invoice a client has already received, so the habits below are worth keeping.

When section 21 applies

Section 21(1) covers a registered vendor's supply where one of these happens:

The supply is cancelled.
The nature of the supply is fundamentally varied or altered.
The agreed price is changed by agreement with the client, because of a discount or for any other reason.
The goods or services, or part of them, are returned to you.
You made an error in stating the price that was agreed.

The section also requires that the VAT you showed on the tax invoice (or declared on a return) is now wrong because of that event. When the tax on the invoice is more than the tax that should have been charged, you give the client a credit note. When it is less, you give them a debit note. For a small business, a credit note is by far the more common of the two.

What a credit note must contain

Section 21(3)(a) lists the particulars. In plain terms:

The words "credit note" in a prominent place.
Your name, address and VAT registration number.
The client's name and address, and their VAT number if they are a registered vendor (there is an exception where the original was an abridged invoice, a supply of R5 000 or less).
The date the credit note was issued.
The amount by which the value of the supply has been reduced and the amount of excess tax, or, where the tax is worked out from the VAT-inclusive price, the amount the price was reduced by and either the tax or a statement that the reduction includes tax at the rate that applied.
A brief explanation of why you are issuing it.
Enough information to identify the transaction it refers to, in practice the original invoice number.

Two provisos matter in practice. It is not lawful to issue more than one credit note for the same excess, so do not raise a second one because the first went missing. If the original is lost, the supplier or recipient may provide a copy clearly marked "copy". The wording is in section 21 on Acts Online, and you should read the current text before relying on this summary.

Which one does your mistake need?

The invoice never left your hands. Cancel it. Nobody has relied on it, and the cancelled record keeps its number accounted for.
A wrong address, name or description, with the amounts right. This is a correction to the particulars, not to the VAT. Section 20 makes it unlawful to issue more than one tax invoice for each taxable supply, so do not simply raise a second invoice for the same job. If the client already holds the first one, ask your accountant how to handle the correction.
A job cancelled, goods returned, a discount agreed or a price you got wrong, after the client has the invoice. Issue a credit note for the amount that changed, and a fresh invoice if there is still something to charge.
You undercharged and the VAT shown is too low. That is a debit note.

When in doubt about a mistake, the question to ask is whether the client has the invoice and whether the amount or VAT on it is now wrong. If yes to both, you need a credit or debit note, and cancelling on your side is not enough. Our guide to VAT invoice requirements covers what the original document needed in the first place.

Numbering credit notes

The Act asks for the date and the identifying information, not a serial number, on a credit note. Our advice is to number them anyway, in their own series such as CN-0001, separate from your invoices. It makes them easy to list for an accountant and means the invoice series stays unbroken. The reasoning for keeping one series per document type is in our article on invoice numbering rules. That is our practice and not a SARS requirement.

What SortedNexus does and does not do

Cancelling an invoice in SortedNexus sets its status to cancelled. The invoice stays in your list with its number and its history, and there is no delete button on the invoice pages, so a number cannot quietly disappear. That covers the first case in the list above, and nothing more.

It does not issue credit notes or debit notes. If a client already holds the invoice, the cancelled status does not tell them anything. For now, produce the credit note yourself with the particulars above, quote the original invoice number on it, and keep it with the cancelled invoice. We would rather tell you that than imply the Cancel button does the job.

If the invoice belongs to a VAT period you have already submitted, how the adjustment is declared is a question for your accountant, and we have not covered it here.

Keep every invoice and its history in one place

Numbered invoices, a status for each, and nothing deleted by accident. Start with the free builder, or create an account to keep a numbered series.

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Sources

Disclaimer: This article is general information about credit notes and cancelled invoices and about how SortedNexus handles them. Where it describes how a rule works in practice, that is our reading and not a SARS ruling. It is not tax, accounting, or legal advice, and it does not replace advice from a qualified accountant.

Credit notes vs cancelled invoices: how to correct a mistake properly