In the ever-evolving landscape of the UAE’s VAT regime, understanding how to handle rejected invoices is a crucial skill for businesses. One of the key tools used in these cases is a credit note. When an invoice is partially rejected or adjusted after issuance—due to returns, price disputes, or errors—credit notes ensure that VAT obligations are corrected and compliant with Federal Tax Authority (FTA) regulations.
This article covers everything UAE businesses need to know about credit notes: what they are, when to issue them, legal requirements, and what’s changing in 2025.
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Book a DemoA credit note is a legal document issued by a supplier to reduce or correct the value of a previously issued tax invoice. It does not replace or cancel the original invoice but serves to adjust the transaction in the accounting and tax records.
Credit notes are commonly issued for situations such as returned goods, pricing discrepancies, quantity adjustments, or post-sale discounts. Under UAE VAT law, cancelling an invoice is not allowed—instead, a credit note must be used to correct errors or changes. This ensures transparency in VAT reporting and audit readiness.
In real-world scenarios, several situations require the issuance of a credit note. For instance, if a buyer returns goods that are defective or no longer needed, the supplier should issue a credit note to reverse the VAT and revenue tied to the returned items. Similarly, if the original invoice included incorrect quantities or prices, or if a discount is negotiated after invoicing, a credit note must be issued to reflect the revised total.
Rather than canceling or reissuing the invoice—which is non-compliant with UAE VAT rules—a credit note provides a traceable and legally recognized way to amend the transaction.
To comply with UAE VAT regulations, a credit note must meet specific documentation standards. It should include:
Maintaining these details ensures your credit notes are audit-proof and supports correct filing in your VAT returns.
Rejected invoices typically arise when the buyer disputes the invoice after it has been issued—either due to errors in pricing, quantity, or dissatisfaction with the goods or services provided. Instead of modifying or canceling the invoice, businesses must issue a credit note that adjusts the transaction and reflects the correct VAT liability.
This credit note should be clearly linked to the original invoice and recorded in both the supplier’s and buyer’s accounts. It ensures that VAT is only paid on the accepted portion of the transaction and that financial reporting remains transparent.
Starting in 2025, the UAE has rolled out stricter VAT credit note regulations to improve compliance and efficiency. Businesses should be aware of the following changes:
These rule changes make it imperative for companies to review and update their VAT processes, train staff, and use systems that support timely and accurate credit note issuance.
As VAT regulations become more stringent, businesses should follow these best practices to maintain compliance:
Keeping processes tight and technology up-to-date will reduce the risk of VAT errors, improve audit readiness, and protect your business from penalties.