What is a credit note?

If you have already sent an invoice to a customer but, for whatever reason, need to reduce the amount. Whether by a partial or full refund, you issue a credit note.

Think of a credit note as a carefully applied eraser to an invoice already issued: when something later reduces the consideration (a return, an agreed discount, or an error in price or VAT), it formally decreases the invoiced amount and VAT so that both parties’ accounts and tax positions return to the correct figures. ¹

Some people call a credit note a “refund note”, but refund and credit note are not the same thing. A refund is money actually paid back; a credit note is the document that records the amount to be refunded or set off. The two are related but not identical. Where consumers have a statutory right to a refund, a credit note alone is not a sufficient remedy.

VAT Credit Note

If your invoice is not a VAT invoice, handling is simpler because VAT is not involved. If a refund affects VAT, you must follow HMRC’s rules. The points below relate to VAT credit notes; non‑VAT credit notes may follow different practices.

When should I issue one?

There are two clocks to keep in mind:

• Price goes down / consideration decreases (for example, a return or an agreed discount): Issue the credit note within 14 days of that decrease.
• You’ve already paid a refund: Issue the credit note within 14 days of paying the refund.

For VAT credit notes, HMRC require that the credit note is issued within 14 days of the decrease in consideration. ²

Credit note examples

Example #1 Return

• Original invoice
  net £1,000, VAT at 20% = £200 (gross £1,200). The customer returns part of the supply; you agree to reduce the net by £150.
• Credit note
  net −£150, VAT −£30 (at the original 20%), total −£180; and quote the original invoice number.

Example #2 Retrospective price reduction

After completion you agree to reduce the total price by 5%.
Issue the credit note within 14 days of the agreement, using the VAT rate applicable at the original tax point.

What must a valid VAT credit note include?

HMRC are specific. To be valid for VAT, a credit note should:

• Give the customer real value (a genuine entitlement to a refund or to offset against future invoices).
• Show: a unique number and date; supplier name, address and VAT number; customer name and address; description of goods or services and quantities; net amount credited; VAT rate and VAT amount credited (in sterling); and the number and date of the original VAT invoice (or be able to prove which supply it relates to).
• Mark it “This is not a credit note for VAT” if you and a fully recoverable customer agree not to adjust VAT, and still adjust your records so the VAT Return is correct. ³

Finally, you can use Createinvoice.uk to issue credit notes. Try it now with our easy‑to‑use service.