What Is a Credit Note?
Credit Note
The correct way to reduce or cancel an invoice you have already sent: never by editing it, always by a new, numbered document.
- What Is a Credit Note?
- A credit note is a document a supplier issues to a customer to reduce or cancel an amount already invoiced, for example after an overcharge, a return or an agreed discount. It carries its own number, refers to the original invoice, and for a VAT-registered business must show the VAT credited in sterling.
- A credit note reduces or cancels an invoice you have already sent.
- It is a new document with its own number that refers to the original invoice: you never edit or delete the invoice itself.
- For VAT, it must reflect a genuine mistake, overcharge or agreed reduction, and show the VAT credited in sterling.
- Where you refund the customer, issue the VAT credit note within 14 days of the refund.
A credit note is the paperwork for "we owe you" or "you owe us less". Once an invoice has gone out, it becomes part of two sets of records: yours and your customer's. If it turns out to be wrong, or the sale is partly or wholly undone, the fix is not to change the invoice but to issue a credit note that adjusts it. Both documents then stand side by side, and anyone reading the records can see exactly what happened.
When a credit note is used
| Situation | Credit note for |
|---|---|
| The invoice overcharged the customer | The amount overcharged |
| Goods were returned | The value of the goods returned |
| A discount was agreed after invoicing | The discount |
| The invoice duplicated another | The whole duplicate |
| The invoice went to the wrong customer | The whole invoice, followed by a new invoice to the right customer |
| The order was cancelled after invoicing | The whole invoice |
| VAT was charged at the wrong rate | The VAT difference, with the corrected figures |
| VAT was charged by an unregistered business | The whole invoice, followed by a reissue without VAT |
How a credit note changes what the customer owes
- Original invoice total£1,200
- Credit note total£240
- Amount now owed£960
To be valid for VAT purposes a credit note must reflect a genuine mistake or overcharge or an agreed reduction in the value of the supply, and be issued within 14 days of the refund payment being made to the customer.
What a credit note must show for VAT
VAT Notice 700 sets out what a VAT-registered business's credit note must clearly show:
| Required detail | Example |
|---|---|
| Its identifying number and date of issue | CN-0012, 15 May |
| The supplier's name, address and VAT registration number | Smith Decorating, 4 Mill Lane, GB123456789 |
| The customer's name and address | Harbour Cafe Ltd, 12 Quay Street |
| A description of the goods or services credited | Overcharge on painting, invoice INV-0210 |
| The quantity and amount for each description | 1 x £200.00 |
| The total amount credited, excluding VAT | £200.00 |
| The rate and amount of VAT credited, in sterling | 20%, £40.00 |
| The number and date of the original VAT invoice | INV-0210, 12 May |
It must also give real value to the customer: a genuine entitlement to a refund or to offset the credit against future supplies. A credit note that the customer cannot actually use is not valid for VAT.
Credit notes for businesses that are not VAT registered
The VAT rules do not apply, but a credit note is still the clearest way to reduce or cancel an invoice. Give it a number from its own series, refer to the invoice, state the amount credited and the reason. It keeps your income figures right and your invoice sequence complete, and it gives your customer a document to file against the invoice they already hold.
Numbering credit notes
A credit note is a numbered document in its own right. Most businesses give credit notes their own series, such as CN-0001 onwards, separate from invoices. That keeps the invoice sequence free of gaps and makes credits easy to find. The invoice number generator can set up both series, and the invoice number entry explains why unique, sequential numbers matter.
How a credit note affects your accounts and VAT
A credit note reduces your sales for the period in which you issue it. If the original invoice was in an earlier VAT return, the credit note normally adjusts the VAT for the period in which it is issued, rather than reopening the old return; larger errors follow HMRC's separate rules on correcting VAT errors. For the customer, the credit note reduces their purchase and, if they are VAT registered, the VAT they reclaim.
Under the cash basis, if the original invoice was never paid, the credit note mainly keeps your records complete; if you refund the customer, the refund reduces your income when you pay it. Under accruals, the credit note reduces your income when you issue it.
A credit note in practice
A decorator invoices a café £1,000 plus £200 VAT, total £1,200, as INV-0210. The agreed price was £800 plus VAT. The next day the decorator issues CN-0012: £200 credited, £40 VAT credited, total £240, referring to INV-0210 and its date, with the reason "overcharge: agreed price £800". The café now owes £960. Both documents go into both businesses' records, and CN-0012 reduces the decorator's output VAT for the period in which it was issued.
Credit notes and prompt payment discounts
If you offer a discount for paying early and the customer takes it, VAT Notice 700 lets you adjust the VAT with a credit note. Alternatively, you can put the discount terms on the original invoice, with a statement that the customer can only recover the VAT actually paid, and not issue a credit note. HMRC recommends wording such as: "A discount of X% of the full price applies if payment is made within Y days of the invoice date. No credit note will be issued."
Credit note, debit note and refund
These three are often confused:
| Document or event | Who issues it | What it does |
|---|---|---|
| Credit note | The supplier | Reduces what the customer owes |
| Debit note | Usually the buyer, sometimes the supplier | Requests an adjustment: a credit from the supplier, or an extra charge |
| Refund | The supplier | Returns money already paid, usually alongside a credit note |
A customer's debit note is a request; the supplier's credit note is the response that actually adjusts the invoice.
Receiving a credit note as a customer
When a supplier sends you a credit note, match it to the invoice it refers to and record it as a reduction of that purchase. If you had already paid the invoice, agree with the supplier whether the credit will be refunded or offset against the next invoice, and note which. If you are VAT registered and had reclaimed the VAT on the original invoice, the credit note reduces the VAT you can reclaim, so include it in your VAT records for the period in which you receive it. Keep it with the original invoice: the pair explains your cost.
Credit notes in different kinds of business
Retail and online sellers issue credit notes most often for returns. The credit is for the value of the goods returned, with any delivery charge credited if that is your policy.
Trades and construction use them for overcharges, work not carried out, and disputes that end in a reduction. Where CIS applies, remember that a credit on the labour element also changes the CIS deduction the contractor should have made, so tell the contractor. Under the domestic reverse charge, the credit note shows the VAT credited under the reverse charge in the same way the invoice showed it.
Services and freelancers use credit notes for hours over-billed, cancelled bookings and agreed discounts.
Subscription businesses use them for mid-period cancellations and downgrades, crediting the unused part.
How credit notes protect you
A credit note is not only a correction; it is evidence. It shows that an invoice was reduced for a reason on a date, rather than simply left unpaid. If HMRC reviews your records, your income figures reconcile: invoices less credit notes equal your sales. If a customer later disputes what they owe, the credit note records what was agreed. And if you are VAT registered, a properly issued credit note is what entitles you to reduce the output VAT you had declared. Without one, you would be paying VAT on money you never received.
Keeping credit notes
Keep credit notes with the invoices they adjust, for the same periods as your other records: at least 5 years after the 31 January filing deadline for a sole trader, and 6 years for VAT records. The guide on how long to keep invoices has the detail.
Common mistakes
- Editing the original invoice instead. Two versions of one invoice number then exist in different records.
- Deleting the invoice. It leaves a gap in the numbering and an unexplained debt in the customer's records.
- Leaving out the original invoice number. The customer cannot match the credit to anything.
- Issuing a credit note that gives no real value. For VAT it must be a genuine entitlement to a refund or offset.
- Forgetting the replacement. If the credit cancels an invoice for work that still stands at a different price, issue the corrected invoice straight away.
Related guides
For step-by-step fixes, see how to correct an invoice for partial credits and reissues, and how to cancel an invoice for full cancellations. For disputes that end in a reduction, see invoice disputes. The VAT calculator works out the VAT to credit.
A credit note checklist
Before you send one, check: it has its own number from your credit note series; it is dated today; it names the invoice it adjusts by number and date; it describes what is being credited and why; the amounts, and any VAT, are right; and you have decided whether the customer gets a refund, an offset or simply owes less. Then send it with a line of explanation, record it, and file it with the invoice. Done this way, a credit note takes minutes and settles the matter for good.
People also ask
Self-employed? Here is when Making Tax Digital applies
If you are self-employed, Making Tax Digital for Income Tax applies to you from 6 April 2026 if your qualifying income is over £50,000, and from 6 April 2027 if it is over £30,000. TapTax keeps your digital records and sends your quarterly updates to HMRC, and it is HMRC-recognised.
Start freeRelated guides and calculators
More from the glossary
Frequently asked questions
When should I issue a credit note?
Whenever an invoice you have sent needs to be reduced or cancelled: an overcharge, returned goods, an agreed discount after the event, a duplicate, or an invoice sent to the wrong customer.
Does a credit note need its own number?
Yes. VAT Notice 700 requires a valid credit note to show its identifying number and date of issue, as well as the number and date of the original invoice.
How quickly must a VAT credit note be issued?
Where a refund is paid to the customer, a valid credit note must be issued within 14 days of the refund payment being made.
Sources
Official guidance on GOV.UK.