Leveraging credit and debit notes for output tax
NOTES MUST INCLUDE A CONCISE EXPLANATION OF THE CIRCUMSTANCES LEADING TO THEIR ISSUANCE
It often happens that a value-added tax (VAT) vendor issues a tax invoice which later requires updates or amendments. The question that arises is how such changes can be made within the legal framework of the Value-Added Tax Act No. 89 of 1991. References to sections herein shall be to sections of the VAT Act.
The levy of output tax, time of supply and issuing of an invoice
Section 7(1)(a) provides that VAT shall be levied on the value of a supply by any vendor of goods or services supplied by him in the course or furtherance of any enterprise. Section 10(2) determines that the value of a supply is the amount of consideration for such supply less so much of the amount as represents tax (ie VAT). The amount of consideration is:
● To the extent that such consideration is a consideration in money, the amount of the money.
● To the extent that such consideration is not a consideration in money, the open market value of that consideration.
Section 9(1) regulates the time of supply and deems the supply to take place when the supplier issues an invoice for that supply or when any payment of consideration is received by the supplier, whichever time is earlier.
Regarding issuing a tax invoice, section 20(1) requires a vendor making a taxable supply to issue a tax invoice containing the particulars prescribed in the section within 21 days of the date of the supply. Paragraph (i) of the proviso to section 20(1) stipulates that issuing more than one tax invoice for each taxable supply is unlawful.
In other words, a VAT vendor must issue a tax invoice for every supply. However, simply issuing an additional invoice because a prior invoice’s consideration was too little, is unlawful.
What, then, is the legislative provisions where an initial invoice is incorrect (ie something as simple as the consideration on the tax invoice is understated)?
Credit and debit notes
The use and effect of credit and debit notes is regulated by section 21. This section applies, among other things, where (i) the supply has been cancelled, (ii) the consideration has been altered by agreement with the recipient, or (iii) an error occurred in stipulating the amount of consideration.
A credit note or a debit note may, however, only be issued if output tax has been incorrectly accounted for (due to the circumstances listed in (i) to (iii) above) and if the supplier issued a tax invoice that reflects an incorrect amount of output tax, or submitted a VAT return on which an incorrect amount of output tax has been accounted for.
In these circumstances, the supplier must, in the tax period in which it has become apparent that the output tax is incorrect, (i) account for an additional amount of output tax (by way of a debit note) when the output tax actually accounted for is less than what should have been accounted for, or (ii) make a deduction (of input tax) in terms of section 16(3) or a reduction of the output tax attributable to the said tax period (by way of a credit note) when the output tax actually accounted for exceeds the output tax properly chargeable in relation to that supply.
The act requires the supplier to provide the debit or credit note to the recipient. The recipient may make the relevant adjustment in the tax period in which the credit or debit note is issued.
Debit and credit notes play a crucial role in tax compliance, with specific details mandated by section 21(3)(a) and (b) for their proper documentation. These details include labelling the note as a “debit note” or “credit note”, providing comprehensive information such as the supplier's and recipient’s names, addresses, and VAT registration numbers, along with the issuance date. Additionally, a debit note should specify the increased value of the supply or consideration and the additional tax, while a credit note should detail the reduced value and excess tax or include a statement indicating tax inclusion and its rate.
Furthermore, the notes must include a concise explanation of the circumstances leading to their issuance and adequate information to identify the relevant transaction, such as referencing the original tax invoice number and its issuance date. This meticulous documentation ensures transparency, accuracy, and compliance with tax regulations, facilitating efficient recordkeeping and audit procedures for businesses and tax authorities alike.
In essence, the process of rectifying errors in an invoice extends beyond mere modifications to the existing document or the issuance of an additional invoice pertaining to the same transaction. Instead, adherence to formal protocols mandates the creation of a dedicated document, such as a debit or credit note, designed explicitly to address inaccuracies found in the initial invoice.
These corrective notes are required to include a specified minimum set of information as per regulatory guidelines. It is, therefore, crucial that sufficient systems are in place to ensure adequate invoicing. ● Estian Haupt is associate director: SA direct tax; Leonard Willemse is associate director: SA indirect tax and Angelique Stronkhorst is a senior associate at AJM Tax.