Once you are ready, you can approve it and send it to your customer.
Credit notes can reduce your tax bill
Many companies have outstanding sales invoices sometimes dating back to even years.
If your company is one of them, and you are registered for VAT (and submit your VAT on an accrual basis):
Then you paid VAT to HMRC on your sales invoices, but you have never received it from your customers.
If these sales invoices have been outstanding for more than 6 months, then you can write them off as bad debt.
It means that on your next VAT return, you will claim back the VAT you paid to HMRC, but never received it from your customer.
How it can help your cash flow
In extreme cases, they could even save the day.
This happened to a customer we were consulting years ago.
He had a few big clients with big sales invoices and one of them hasn’t paid them for over 6 months. The company had to submit and pay their VAT and they didn’t know how they can even pay their staff salary for the month.
We noticed that they had these big outstanding sales invoices with 20% VAT on them. Their total was £50k + £10k in VAT.
As he confirmed they are bad debt, we issued a credit note and wrote them off. This meant that now, he not only didn’t have to pay any VAT, but instead, he received close to £10,000 back from HMRC. As it was very close to the VAT deadline date, he received this money in days and could pay his staff salary.
We hope this article helped and highlighted the importance of issuing credit notes. If you have any questions, please let us know in the comments below.
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