What is a credit note and when should I issue one?

A credit note is a document that reduces the amount owed on a previously issued invoice. You should issue a credit note when goods are returned, an invoice contains an error (e.g. overcharge), a retrospective discount is agreed, services were not fully delivered, or goods arrived damaged. The credit note should reference the original invoice number.

How does a credit note affect my VAT return?

If you are VAT registered, a credit note that reduces the VAT previously charged must be reflected in your VAT return. You reduce your output tax by the VAT amount shown on the credit note. Your customer must reduce their input tax by the same amount. Both adjustments should be made in the VAT period in which the credit note is issued (VAT Regulations 1995, Regulation 24).

Should credit notes have their own numbering sequence?

Yes. It is best practice to maintain a separate sequential numbering series for credit notes (e.g. CN-001, CN-002). This keeps your records clear and makes it easy to distinguish credit notes from invoices during audits. HMRC expects your records to be orderly and easy to follow.

Can I issue a credit note instead of a refund?

Yes. A credit note can be offset against future invoices rather than resulting in a cash refund. This is common in B2B relationships where there is an ongoing trading relationship. The credit note simply reduces the customer's outstanding balance. Make sure both parties agree on how the credit will be applied.

Is there a time limit for issuing credit notes?

There is no specific statutory time limit for issuing credit notes, but HMRC expects them to be issued promptly when an adjustment is needed. For VAT purposes, the adjustment must be made in the correct VAT period. Delaying a credit note could result in VAT being accounted for incorrectly. As a rule, issue credit notes as soon as the issue is identified and agreed with the customer.

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

A credit note is a document that records a reduction in the amount owed. A refund is the actual return of money. A credit note may lead to a refund, or the credited amount may be applied against future purchases. In accounting terms, the credit note adjusts your sales ledger, while the refund is a cash transaction.

Credit Note Template

Issue a professional credit note with our free UK template.

FreePDF & Word

Your data stays on your device — nothing is sent to any server.

Your Details

Your Business Name*

Your Business Address*

Your Email Address

We are VAT registered

Recipient Details

Client Name / Business Name*

Client Address*

Invoice Details

Credit Note Number*

Use a separate numbering sequence from your invoices

Credit Note Date*

Original Invoice Number*

Original Invoice Date*

Line Items

Reason for Credit*

Description / Details of Credit*

Credit Amount (Net) £*

Total Credit Amount £*

Payment Details

How Will the Credit Be Applied?*

Document Preview

CREDIT NOTE From: [businessName] [businessAddress] To: [clientName] [clientAddress] Credit Note Number: [creditNoteNumber] Credit Note Date: [creditNoteDate] Original Invoice Number: [originalInvoiceNumber] Original Invoice Date: [originalInvoiceDate] -------------------------------------------------- Reason for Credit: [reasonForCredit] -------------------------------------------------- [creditDescription] -------------------------------------------------- Credit Amount (Net): £[creditAmountNet] ------------------ TOTAL CREDIT: £[totalCreditAmount] -------------------------------------------------- This credit will be applied as follows: [refundMethod]

Important Notes

Legal Disclaimer

Under the VAT Regulations 1995 (SI 1995/2518), Regulation 24, where a VAT-registered supplier issues a credit note that reduces the VAT originally charged, the supplier must reduce their output tax in the VAT period in which the credit note is issued. The customer must correspondingly reduce their input tax. A credit note must contain sufficient information to identify the original supply, including the original invoice number, the reason for the credit, and the amount of VAT being adjusted. HMRC guidance (VAT Notice 700, section 18) confirms that credit notes should be issued promptly when an adjustment is needed and should be clearly marked as credit notes (not negative invoices). For non-VAT-registered businesses, a credit note serves as a record of the agreed reduction and should still reference the original invoice for audit trail purposes.

This template is provided for informational purposes only and does not constitute legal advice. For complex legal matters, we recommend consulting a qualified solicitor.

Frequently Asked Questions

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