A credit note is an official document issued by a seller to reduce the amount owed by a buyer on a previously issued invoice. In Kenya, credit notes are governed by KRA regulations and must follow specific formatting rules. Whether you are correcting an invoicing error, processing a return, or offering a discount after the fact, understanding how to properly issue a credit note is essential for compliance.
When Should You Issue a Credit Note?
Credit notes are not issued casually -- there must be a legitimate reason to reduce the amount on an existing invoice. KRA auditors will examine your credit notes during tax reviews, so every one must be justified and documented. Below are the most common scenarios that require a credit note in Kenya.
- Goods were returned by the buyer due to defects, damage, or incorrect delivery.
- The original invoice contained a pricing error or incorrect quantity.
- A post-sale discount or rebate was agreed upon after the invoice was issued.
- Services were partially delivered or not delivered to the agreed specification.
- A duplicate invoice was issued in error and needs to be cancelled.
- The client was overcharged due to a calculation mistake on the original invoice.
KRA Requirements for Credit Notes
Under the Kenya VAT Act 2013, credit notes must meet specific requirements to be valid for tax purposes. A credit note that does not comply with these rules may be rejected during a KRA audit, which could result in additional tax assessments and penalties. Always ensure your credit notes contain all the required information.
| Required Field | Description |
|---|---|
| Document Title | Must be clearly marked as "Credit Note" |
| Credit Note Number | Unique sequential number (e.g., CN-2025-0001) |
| Date of Issue | Date the credit note is issued |
| Original Invoice Reference | The invoice number being adjusted |
| Seller Details | Business name, address, and KRA PIN |
| Buyer Details | Client name, address, and KRA PIN (B2B) |
| Reason for Credit | Clear explanation of why the credit is issued |
| Amount | The credit amount, with VAT shown separately |
How Credit Notes Affect Your VAT Returns
When you issue a credit note, you are effectively reducing your output VAT for that period. This adjustment must be reflected in your VAT return for the month in which the credit note was issued. For the buyer, the credit note reduces their input VAT claim by the corresponding amount. Both parties must account for credit notes accurately to avoid discrepancies during KRA reconciliation.
KRA Rule: Credit notes must be issued within the same tax period as the original invoice whenever possible. If issued in a later period, the VAT adjustment is recorded in the period the credit note was issued, not the original invoice period.
Credit Note vs Refund: What Is the Difference?
A credit note reduces the amount owed on a future invoice or offsets an existing balance, while a refund involves returning actual money to the buyer. In practice, many Kenyan businesses issue a credit note first and then process the refund separately. The credit note is the accounting document that justifies the refund in your books and for KRA purposes.
Best Practices for Issuing Credit Notes
- 1Always reference the original invoice number on the credit note so both documents can be linked during audits.
- 2Use a separate numbering sequence for credit notes (CN-YYYY-NNNN) to distinguish them from regular invoices.
- 3Include a clear, concise reason for the credit to avoid questions from KRA auditors.
- 4Process credit notes promptly -- delays can create confusion in your accounts and complicate VAT returns.
- 5Keep copies of all supporting documentation (return receipts, correspondence, amended contracts) alongside the credit note.
Automating Credit Note Management
Manually creating and tracking credit notes is risky because errors can lead to VAT discrepancies. Invoicing software that supports credit notes can automatically link them to the original invoice, adjust your VAT calculations, and maintain a clean audit trail. This is especially important for businesses that process a high volume of transactions or deal with frequent returns.
