What Is a Credit Note? When to Issue One and What to Include

A credit note is a document that reduces or cancels an existing invoice. When you have already invoiced a customer but the amount needs to change - because work was not completed, the price was wrong, or the job was cancelled - a credit note is how you formally adjust the record.

This guide explains what a credit note is, when you need to issue one, what it must contain, and how it affects your VAT return.

What is a credit note?

A credit note is the legal opposite of an invoice. An invoice says "you owe me this amount." A credit note says "I am reducing what you owe me by this amount." It is a formal accounting document, not just a message or an edited invoice.

When you issue a credit note, it sits alongside the original invoice in both your books and the customer's books. The net effect is the original invoice amount minus the credit note amount.

Example: You invoiced a customer for £1,200. After a dispute over unfinished work, you agreed to reduce the invoice by £200. You issue a credit note for £200. The customer now owes £1,000.

A credit note can be for a partial amount (reducing the invoice) or the full invoice amount (cancelling it entirely).

When should you issue a credit note?

Common situations where a credit note is needed:

• Invoicing error: You charged the wrong amount, applied the wrong VAT rate, or listed the wrong job
• Partial work: The job scope was reduced after the invoice was raised
• Returned materials: You supplied materials that were returned unused
• Agreed discount: A retrospective discount was agreed after invoicing
• Cancellation: The job was cancelled after a deposit invoice was raised
• Duplicate invoice: You accidentally sent the same invoice twice

In all these cases, do not edit or delete the original invoice. Invoices are sequential numbered documents in your records. Altering them after the fact creates inconsistencies in your bookkeeping and can cause problems with HMRC. Issue a credit note instead.

What must a credit note contain?

There is no mandatory format in UK or Irish law, but a credit note should always include:

• The title "Credit Note" clearly stated at the top
• A unique credit note number (sequential in your own numbering system)
• Date of issue
• Your name or business name and address
• The customer's name and address
• The original invoice number this credit note refers to
• A description of what is being credited
• The credit amount, net of VAT
• VAT amount (if applicable) and the VAT rate applied
• Total credit amount including VAT

If you are VAT-registered, a credit note that reduces a VAT invoice must also carry your VAT registration number. HMRC calls this a credit note for VAT purposes and it is your evidence for reducing your VAT output liability.

How does a credit note affect your VAT return?

If the original invoice included VAT, the credit note reduces both the amount the customer owes and the VAT you owe to HMRC.

Example: You invoiced £1,000 + 20% VAT = £1,200. You issue a credit note for £200 + 20% VAT = £240. Your net sales for VAT purposes reduce by £200 and your output VAT reduces by £40.

UK: Reduce your output tax in Box 1 of your next VAT return. Keep the credit note in your VAT records - HMRC can request it during an inspection.

Ireland: Reduce your T1 (VAT on sales) in the relevant bi-monthly VAT return. Revenue expects the adjustment to be made in the period the credit note was issued, not deferred to a later period.

Credit note vs refund - what is the difference?

A credit note is an accounting document. A refund is a cash payment. They are not the same thing.

When you issue a credit note, you are adjusting the balance on paper. The customer owes you less. What happens next depends on whether the original invoice was already paid:

• Invoice not yet paid: The customer pays the reduced amount. The credit note settles against the original invoice and they pay the net.
• Invoice already paid in full: You have two options - issue the credit note and offset it against a future invoice (credit on account), or issue the credit note and pay the difference in cash as a refund.

In both cases, the credit note is the document that records the adjustment. The refund is the cash movement that follows.

How to issue a credit note

If you use invoicing software, you can usually raise a credit note directly against the original invoice. The system generates the credit note number, links it to the original, and updates the outstanding balance automatically.

If you invoice manually or use a template, create a new document following the same format as your invoices but headed "Credit Note." Reference the original invoice number clearly.

Send the credit note to your customer the same way you sent the original invoice - by email, post, or WhatsApp. Keep a copy in your records alongside the original invoice.

Frequently asked questions

What is a credit note?

A credit note is a formal document that reduces or cancels an existing invoice. It reduces the amount the customer owes you - either partially or in full. Both parties record it alongside the original invoice in their accounts.

When should I issue a credit note?

Issue a credit note when you have already raised an invoice but the amount needs to change - because of a pricing error, partial work, returned materials, an agreed discount, or a cancellation. Never edit or delete the original invoice; a credit note is the correct way to adjust it.

Does a credit note affect my VAT return?

Yes, if the original invoice included VAT. The credit note reduces your VAT output liability by the VAT amount on the credit. Adjust it in your next return - UK: reduce Box 1. Ireland: reduce T1 in your bi-monthly return. Keep the credit note as a VAT record.

What is the difference between a credit note and a refund?

A credit note is a document that adjusts the accounting balance. A refund is a cash payment. You can issue a credit note and apply it as credit against a future invoice instead of paying cash. If you do pay cash, the credit note documents why.

Does a credit note have to be in a specific format?

There is no prescribed format in UK or Irish law. However, it must clearly say "Credit Note" at the top, include the original invoice number it refers to, your name and address, the customer's name and address, the amounts (net and VAT), and your VAT number if you are VAT-registered.

How long does a customer have to use a credit note?

There is no legal expiry period in UK or Irish law. You can specify an expiry date on the credit note itself if you want to limit it. For VAT purposes, make the adjustment in the period the credit note is issued - do not defer it.