The short answer
- A credit note (in the US, often a credit memo) reduces or cancels an invoice you’ve already sent. It has its own number and date and quotes the original invoice number and date.
- Issue one for a mistake, a return or undelivered work, a discount agreed after invoicing, or a cancelled order that was already invoiced.
- UK VAT: HMRC says a valid credit note must correct a genuine mistake or overcharge, or reflect an agreed reduction in value, and give value to the customer. It must be issued within 14 days of the decrease in consideration, and it is not the way to deal with a bad debt.
- The seller reduces the output VAT it owes; a VAT-registered customer reduces the input VAT it claimed.
- US: there’s no federal VAT. A credit memo is standard business practice, and on a sole proprietor’s Schedule C, returns and allowances reduce gross receipts.
What a credit note does
Once an invoice has gone out, you don’t edit it or delete it. It keeps its number in your sequence, and anything that changes the amount is recorded on a new document: the credit note. Think of it as a negative invoice that points back to the original.
We covered the basic cancel-and-reissue method in our guide to invoice numbering. This guide goes further: every situation where a credit note is the right tool, what it must contain, and how it affects VAT, refunds and your records.
Five situations that call for a credit note
| Situation | Credit note | Example |
|---|---|---|
| Mistake on the invoice (price, quantity, customer, VAT rate) | Full credit, then a new invoice | Unit price £12 instead of £10.50 |
| Goods returned, or part of the work not done | Partial credit | One of four shelving units not fitted |
| Discount or rebate agreed after invoicing | Partial credit | 10% goodwill discount after a late delivery |
| Order cancelled after invoicing, including a refunded deposit | Full credit | Event cancelled, deposit refunded |
| Overcharge spotted after sending | Credit for the overcharge | Six hours billed twice on the same invoice |
Mistake on the invoice (price, quantity, customer, VAT rate)
Credit noteFull credit, then a new invoice
ExampleUnit price £12 instead of £10.50
Goods returned, or part of the work not done
Credit notePartial credit
ExampleOne of four shelving units not fitted
Discount or rebate agreed after invoicing
Credit notePartial credit
Example10% goodwill discount after a late delivery
Order cancelled after invoicing, including a refunded deposit
Credit noteFull credit
ExampleEvent cancelled, deposit refunded
Overcharge spotted after sending
Credit noteCredit for the overcharge
ExampleSix hours billed twice on the same invoice
For deposits, see our guide to the deposit invoice: the credit note then references the deposit invoice by its number and date.
Two situations don’t call for one. A discount agreed at the time of sale goes straight on the invoice. And a customer who simply hasn’t paid doesn’t get a credit note: they get a reminder. Our guide on how to chase an unpaid invoice covers that. If the debt later turns bad, the UK has a separate VAT relief, explained below.
What goes on a credit note
For VAT-registered businesses in the UK, HMRC’s VAT guide (Notice 700) lists what a credit note must show, including its own identifying number and date of issue, the supplier’s and customer’s details, the amount credited excluding VAT, the VAT rate and amount, and the number and date of the original invoice.
Outside VAT, the same structure is simply good practice. A credit note that works anywhere has:
- the title “Credit note”, a unique number (in your invoice sequence or a separate, continuous CN series) and the date;
- your details and the customer’s, exactly as on the original invoice;
- “Credit against invoice [number] of [date]”;
- what is being credited: description, quantity, unit price;
- the amount before tax, the tax rate and tax amount if you charged tax, and the total;
- the reason, in a few words;
- what happens to the credit: refunded (how and when) or deducted from the next invoice.
An example: a partial credit note
On 1 October 2026, Joe Adeyemi, a VAT-registered joiner trading as Adeyemi Joinery, invoices a lettings agency for four fitted shelving units at £600 each: £2,400 plus VAT at 20% (£480), £2,880 in total. On 14 October the agency cancels the fourth unit, which hasn’t been fitted. Joe issues a credit note for one unit.
| Description | Qty | Unit price | Total |
|---|---|---|---|
| Fitted shelving unit, reception (not fitted, cancelled by customer) | 1 | −£600.00 | −£600.00 |
Credit against invoice F-2026-112 of 01/10/2026. Reason: fourth unit cancelled by the customer before fitting. To be deducted from the balance of invoice F-2026-112.
- Its own number and date, in a continuous credit note series.
- The original invoice number and date.
- Amount before VAT, VAT rate and VAT amount credited.
- Reason and what happens to the credit.
After the credit note, the agency owes £2,400 − £600 = £1,800 plus £360 VAT, £2,160 in total. If it had already paid in full, Joe would refund £720 and write “Refunded by bank transfer on …” on the credit note.
UK VAT: the rules HMRC checks
HMRC’s VAT Traders’ Records Manual sets out when a credit note is valid. It must be issued to the customer, correct a genuine mistake or overcharge or reflect an agreed reduction in the value of a supply, give value to the customer, be issued in good faith, and not be issued for a bad debt. In short: no credit notes whose only purpose is to claw back VAT.
Timing. Since 1 September 2019, a credit note must be issued within 14 days of the decrease in consideration. HMRC explains that a decrease in consideration happens when the supplier makes the refund to the customer, so the clock starts when the money goes back, not when the complaint arrives. The VAT is adjusted in the VAT period in which the decrease happens.
Both sides. The supplier reduces its output tax by the VAT on the credit note. A VAT-registered customer that already claimed the VAT on the original invoice reduces its input tax by the same amount. In the example, Joe’s output tax falls by £120, and so does Parkside Lettings’s input tax claim.
Retail sales. Where the supplier wasn’t required to issue a VAT invoice in the first place, for example a shop selling to the public, there’s no requirement for a credit note unless a VAT-registered customer asks for one.
Bad debts are different in the UK
If a customer never pays, don’t issue a credit note: HMRC says credit notes must not be issued for a bad debt. Instead, VAT-registered businesses can claim bad debt relief on the VAT they already paid over, when the debt is more than six months overdue, has been written off in a separate refunds-for-bad-debts account, and the claim is made within four years and six months of the later of the date payment was due or the date of supply. You keep a copy of the invoice and the bad debt account as evidence.
This is one place where countries differ. In France, for example, recovering VAT on an unpaid invoice requires correcting the original invoice first. If you invoice abroad, check the local rule.
US practice: credit memos and sales tax
There’s no federal VAT in the US, so no federal rule on credit note contents. Credit memos are standard practice all the same: they keep your invoice numbers clean and give the customer a document for their own books.
For your income tax, refunds and price reductions still matter. On Schedule C, sole proprietors report returns and allowances on line 2, as a positive number that reduces gross receipts. The IRS describes a sales return as a cash or credit refund given to customers who returned defective, damaged or unwanted products. Your credit memos are the evidence for that line.
If you charged sales tax on the original sale, what happens to the tax on a refund depends on your state’s rules. Check your state tax agency’s guidance before you refund or credit sales tax.
Issuing a credit note in five steps
- 1Find the original invoiceIts number, date, the lines affected and the tax rate used.
- 2Decide full or partialFull if the whole invoice falls away; partial for a return, a missing item or a discount.
- 3Write the credit noteOwn number, original invoice number and date, amounts before tax, tax, total, reason.
- 4Settle the creditRefund it (date and method) or deduct it from the next invoice, and say which on the note.
- 5Reissue if neededAfter a mistake, send a new, correct invoice with the next number in your sequence.
A blank to copy:
CREDIT NOTE CN-[2026-000]
Date of issue: [DD/MM/YYYY]
[Your name, and trading name if any] · [Address] · [VAT number, if registered]
Customer: [Name] · [Address]
Credit against invoice [F-2026-000] of [DD/MM/YYYY]
Reason: [pricing error / return / agreed discount / cancellation]
Description Qty Unit price Amount
[Line from original invoice] [1] −[0.00] −[0.00]
Credit before tax: −[0.00]
Tax at [20]%: −[0.00] (omit if you didn’t charge tax)
Total credit: −[0.00]
[Refunded by bank transfer on DD/MM/YYYY] / [To be deducted from your next invoice]
Credit notes and Binome360
To be clear: Binome360 creates quotes and invoices, each with its own automatic numbering, but it doesn’t generate credit notes. Use the blank above or your accounting software for the credit note itself. The app helps with everything around it: the corrected invoice is a sentence away with the next number, paid invoices are marked as paid, and the refund is logged in your accounts.
Refunded £720 to Parkside Lettings by bank transfer, credit note CN-2026-006
Ready: expense of £720.00 from “Business bank”, category Customer refunds, note “Parkside Lettings, credit note CN-2026-006”, dated today. Save it?
Nothing is saved until you confirm.
Try Binome360 for freeBinome360 isn’t accounting or VAT software and doesn’t replace your accountant for VAT adjustments.
Frequently asked questions
What’s the difference between a credit note and a refund?
The credit note is the document that reduces or cancels the invoice. The refund is the money going back, if the customer had already paid. A credit note can also be settled by deducting it from the next invoice, with no refund at all.
Do credit notes need their own numbers?
Yes. HMRC requires a VAT credit note to show its own identifying number and date of issue. Use your invoice sequence or a separate, continuous credit note series.
How long do I have to issue a credit note in the UK?
For VAT, within 14 days of the decrease in consideration, which HMRC treats as the date you make the refund.
Can I issue a credit note for an unpaid invoice?
Not to recover VAT on a bad debt in the UK: HMRC says credit notes must not be issued for a bad debt. Use VAT bad debt relief once the conditions are met.
In short
A credit note reduces or cancels a sent invoice without touching it: its own number and date, the original invoice number and date, the amount before tax, the tax and a reason. In the UK it must reflect a genuine reduction, be issued within 14 days of the refund, and never be used for a bad debt. First step: find the last invoice you corrected by hand and check that a credit note records the change.
Sources
- HM Revenue & Customs, “VAT guide (VAT Notice 700)”, section 18 (credits and debts), last updated 25 June 2026: gov.uk.
- HMRC internal manual, VAT Traders’ Records Manual, VATREC13040, “Credit and debit notes: what are the conditions of a valid credit note?”: gov.uk.
- HMRC internal manual, VAT Supply and Consideration, VATSC06635, “Changes to Regulation 38 from 1 September 2019”, updated 7 March 2025: gov.uk.
- HM Revenue & Customs, “Relief from VAT on bad debts (VAT Notice 700/18)”: gov.uk.
- IRS, “Instructions for Schedule C (Form 1040)” (2025), line 2, returns and allowances: irs.gov.
- Code général des impôts (France), article 272 (VAT recovery subject to prior correction of the invoice): legifrance.gouv.fr.
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