Credit note: how to correctly cancel an invoice

Issued an invoice and need to correct it? A customer returned goods, you agreed on a discount, or you accidentally invoiced the wrong amount? In all of these cases, you need a credit note — also known as a corrective tax document. In this article, we'll show you when and how to issue one correctly, what it must contain, and what impact it has on your VAT.

What a credit note is and what it's used for

A credit note is an accounting and tax document that a supplier uses to correct (typically reduce) a previously invoiced amount. It doesn't "delete" the original invoice — the original remains in the records unchanged. A credit note is a separate document that references the original invoice and adjusts its financial impact.

When a credit note is issued

There are many reasons to issue a credit note. The most common include:

• Goods or service complaint — the customer returned defective goods and you're refunding them
• Discount granted after invoicing — you agreed on a volume discount or early payment discount
• Incorrectly invoiced amount — the invoice stated a higher price than what was actually agreed
• Partial non-delivery of a service — you invoiced 10 hours of work but only completed 8
• Deposit refund — the customer cancelled their order and you're returning their deposit
• Change in contract terms — a subsequent adjustment to the agreed price

Corrective tax document vs. corrective invoice: the difference for VAT payers and non-payers

There is a fundamental difference between VAT payers and non-payers:

For VAT payers: corrective tax document

If you are a VAT payer, you are governed by Act No. 235/2004 Coll., on Value Added Tax. Issuing a corrective tax document is your legal obligation whenever you correct the tax base or the amount of tax.

For non-VAT payers: corrective invoice

Non-VAT payers issue a standard corrective invoice (credit note). They have no obligation to deal with VAT, but must comply with the rules for maintaining their tax records or accounting.

Mandatory details of a corrective tax document

A corrective tax document must, pursuant to § 45 of the VAT Act, include the following information:

Details of a corrective invoice for non-VAT payers

Non-VAT payers don't have such a strict statutory list of requirements, but a credit note should at minimum contain:

• Document designation (e.g. "Corrective invoice" or "Credit note")
• Credit note number
• Reference to the number of the original invoice
• Supplier and customer details
• Reason for the correction
• The amount being corrected (the difference)
• Date of issue
• Method of settlement (refund, offset, etc.)

How to issue a credit note: a step-by-step guide

The impact of a credit note on VAT

The VAT impact of a credit note is one of the most important aspects that you, as a VAT payer, need to handle correctly.

On the supplier's side (the issuer of the credit note)

When you issue a credit note, you reduce your tax base and the VAT you remit. You report this correction in the VAT return for the tax period in which the customer received the credit note — not the period in which you issued it.

This is the key rule: if you issue a credit note on 28 January but the customer receives it on 3 February, you report the VAT correction in the February return (or in the first quarter return, if you're a quarterly VAT payer).

On the customer's side (the recipient of the credit note)

The customer must reduce their VAT deduction entitlement in the tax period in which they received the credit note. The customer does not need to confirm the credit note — it is sufficient that the supplier issued it on legitimate grounds.

Deadline for correcting VAT

A correction to the tax base and VAT amount cannot be made after 3 years have elapsed from the end of the tax period in which the obligation to declare tax on the original invoice arose. After this deadline, the VAT correction is time-barred.

Accounting treatment of a credit note

In tax records (typically for the self-employed)

A credit note in tax records is reflected as follows:

• For the supplier: a reduction in income (a negative entry in the income ledger) and the creation of a liability to refund the money
• For the customer: a reduction in expenses (a negative entry in the expenditure ledger) and the creation of a receivable for the refund

In double-entry bookkeeping

Posting a credit note on the supplier's side:

| Transaction | Debit | Credit | |-------------|-------|--------| | Reduction in revenue | 604 — Sales of goods | 311 — Receivables | | Reduction in VAT | 343 — Output VAT | 311 — Receivables | | Refund of money | 311 — Receivables | 221 — Bank account |

Posting on the customer's side:

| Transaction | Debit | Credit | |-------------|-------|--------| | Reduction in expense | 321 — Payables | 504 — Cost of goods sold | | Reduction in VAT | 321 — Payables | 343 — Input VAT | | Receipt of refunded money | 221 — Bank account | 321 — Payables |

Credit note vs. debit note: what's the difference

Alongside credit notes, there is also a debit note — a corrective tax document that, conversely, increases the originally invoiced amount.

How to correctly cancel an invoice

Cancelling an invoice and issuing a credit note are not the same thing. An invoice can only be cancelled if it has not yet been posted and sent to the customer. Once an invoice enters the accounting cycle, you cannot simply "delete" it — you must issue a credit note.

When a cancellation is sufficient (without a credit note)

• You created the invoice but haven't sent it yet
• You spotted the error immediately and the invoice hasn't been posted
• The invoice has had no accounting impact yet

When you must issue a credit note

• The invoice has been sent to the customer
• The invoice has been posted (by you or the customer)
• The invoice has been included in a VAT return
• A significant amount of time has passed since the invoice was issued

Practical examples for the self-employed

Example 1: Graphic designer and a discount for late delivery

Pavel is a graphic designer (VAT payer). He invoiced a client CZK 25,000 + VAT for a logo design. Due to a delay, they agreed on a 20% discount.

Solution: Pavel issues a corrective tax document for −CZK 5,000 (tax base) and −CZK 1,050 (VAT 21%). He refunds the client a total of CZK 6,050.

Example 2: Developer and an undelivered part of a project

Jana is a programmer (non-VAT payer). She invoiced CZK 60,000 for website development. The client requested the removal of one feature worth CZK 15,000, as they no longer needed it.

Solution: Jana issues a corrective invoice (credit note) for −CZK 15,000, referencing the original invoice. She doesn't need to deal with VAT, as she is not a VAT payer.

Example 3: Credit note for the full invoice amount (full cancellation)

Tomáš is a consultant (VAT payer). He invoiced CZK 50,000 + VAT for a training session that ultimately did not take place.

Solution: Tomáš issues a corrective tax document for the full amount: −CZK 50,000 (tax base) and −CZK 10,500 (VAT). This fully voids the invoice without removing it from his records.

Common mistakes when issuing credit notes

Frequently asked questions (FAQ)

Do I need to issue a credit note as a non-VAT payer?

Yes, even non-VAT payers should issue a corrective invoice (credit note) if they need to correct a previously invoiced amount. However, you have no obligation to deal with VAT, and the formal requirements are less strict.

Can a customer refuse a credit note?

A customer cannot refuse a legitimately issued credit note. If you issued the credit note in accordance with the law (e.g. based on an accepted complaint), the customer must accept it and reflect it in their accounting.

How long do I need to archive a credit note?

You must archive a credit note in the same way as other tax documents — for a minimum of 10 years from the end of the tax period in which the supply took place. For self-employed individuals using tax records, the minimum retention period is 5 years.

Can I issue a credit note for an invoice that's more than 3 years old?

You can issue a corrective invoice (credit note), but you can no longer apply a VAT correction. The financial settlement (refund) is still possible under civil law.

How does a credit note appear in the VAT control statement?

A corrective tax document is reported in the VAT control statement in section A.4 (for the supplier) and B.2 (for the customer) for documents up to CZK 10,000 including VAT, or in section A.1/B.1 for documents above CZK 10,000.

Do I need to show negative amounts on a credit note?

Yes, the differences on a credit note are shown with a negative sign, because they reduce the original tax base, VAT, and total amount. A debit note, by contrast, contains positive values.

Simplify credit note issuance with DokladBot

Issuing credit notes requires precision and a solid knowledge of the regulations. One mistake in the VAT rate or the wrong period in your return, and you've got a problem with the tax authority.

Useful links to official sources

• Act No. 235/2004 Coll., on Value Added Tax — § 42–45 (correction of the tax base)
• Czech Financial Administration — information on VAT and tax documents
• MOJE daně portal — electronic VAT return filing

---

This article is for informational purposes only and does not replace professional tax advice. Tax regulations are subject to change — always verify the current wording of the law. Last updated: February 2026.