Credit notes and invoice corrections: what to do when the amount changes or goods are returned

Below you will learn when a credit note is sufficient and when a corrective invoice is needed, how to correct an invoice step by step, what to do when goods are returned, how the adjustments affect VAT accounting and what to check afterwards, including when the original document was a structured e-invoice.

When do you need a credit note, and when a corrective invoice?

Start with the reason, rather than the document’s name. There is a difference between an error in the original invoice and a new agreement reached after it was issued. The circumstances determine how to document the changes and whether previously declared information needs to be reviewed.

The situation and what to check

The State Revenue Service (VID) explains that corrective invoices may be used to fix errors both by registered VAT payers and by persons who are not registered in the VAT register. Invoice corrections are therefore also relevant to self-employed people and small businesses that do not apply VAT to their transactions.

What to prepare before correcting invoices

To make the correction clear to both the client and the accountant, prepare the following information:

• the original invoice number, date and recipient;

• the reason for the correction and a supporting document, such as an agreement on a discount or information about returned goods;

• the specific goods or service line items and the changed quantity or price;

• the amount by which the transaction changes and the balance after the correction;

• VAT information, if applicable to the original transaction;

• payments already received and the intended settlement after the changes.

This is a preparation checklist. The document itself must meet the applicable requirements for mandatory details. A document amending an original VAT invoice must include an unambiguous reference to the original invoice and the specific amendments.

Simply renaming the invoice file “corrected” does not explain the nature of the changes. Keep a clear sequence of documents so that, several months later, you can explain what the price was, what changed and how the settlement ended.

Example: two out of five items are returned

Suppose the seller is not registered for VAT. They sold five items for 40 EUR each, and the original invoice total is 200 EUR. The buyer later returns two items, and the parties agree to reduce the transaction amount.

The returned goods are worth 2 × 40 = 80 EUR, so the total transaction value after the adjustment is 120 EUR.

• Original invoice: 200 EUR

• Value of returned goods: 80 EUR

• Transaction amount after adjustment: 120 EUR

To document the reduction in the transaction value, the seller prepares a credit note, or corrective invoice, for 80 EUR, referring to the original invoice and stating the reason for the adjustment.

This is a simplified calculation example without VAT, rather than a credit note form template.

If the client has not paid yet

After the adjustment, the client must pay 120 EUR. The seller sends the corrective invoice, specifying the original invoice, the reduction made and the remaining amount payable. The original invoice together with the adjustment document supports the new settlement balance.

If the client has already paid 200 EUR

If the client has paid the original invoice in full, the return of the goods creates an overpayment of 80 EUR. The seller refunds this amount to the client or, by mutual agreement and where a legal basis exists, offsets it against other obligations.

When making a refund or offset, it is important to retain the documents supporting the transaction and ensure they are linked to the original invoice and its adjustment.

If the client has paid only 100 EUR

If the client has paid 100 EUR of the original invoice amount, the remaining amount payable after the adjustment is 20 EUR(120 − 100).

When sending a payment reminder, take into account the original invoice, the adjustment document and payments already received so that the client is not asked to pay more than is actually due.

What should you consider if VAT was applied to the transaction?

If VAT was applied to the original transaction, an invoice adjustment may affect not only settlement with the client but also VAT accounting and the VAT return. The seller must assess whether the output VAT needs to be adjusted, while a buyer who deducted input VAT on the transaction must make the corresponding input VAT adjustment.

It is important to distinguish between correcting an error in the original invoice or VAT return and situations where the transaction value changes later, for example because goods are returned or a discount is granted.

If goods are returned after the original transaction, the VAT adjustment is generally recorded in the tax period in which the grounds for the adjustment arose under VAT rules. However, if an error was made in the original VAT return, it may be necessary to amend the return for the relevant earlier period.

To determine the correct accounting period for the adjustment, it is advisable to retain the original invoice, the adjustment document and information about the return of goods or another reason for the adjustment. It is also important to document the original transaction date, the invoice issue date and the date on which the grounds for the adjustment arose.

If the original invoice is a structured e-invoice

If the original invoice was prepared as a structured electronic invoice, its correction must comply with structured e-invoicing requirements: prepare a corrective e-invoice and include a reference to the original invoice number.

Where legislation requires the use of structured e-invoices, preparing a standard PDF document alone is not sufficient. The corrective e-invoice must meet the specified format requirements for structured electronic invoices.

Before sending, therefore, also establish the format and channel through which the partner received the original document. Check that the correction reaches the same responsible person or the system where invoices are processed.

Checklist after making the correction

• It is clear which original invoice is being corrected.

• The reason for the correction and the amounts are explained.

• The client has received the correction document and a clear balance.

• The payment received has not been incorrectly recorded as a new transaction.

• Any refund made is separately visible and supported.

• The impact on VAT or other reports already prepared has been checked.

When working in pats.lv, compare the original invoice and payment information with the correction documents. If the exact sequence of steps for the particular type of correction is unclear, ask support. This article does not imply that all types of adjustments can be made in the system using one universal button.