Credit Note Template: What to Include and When to Issue One
In this guide
What Is a Credit Note?
A credit note (sometimes called a credit memo) is a document issued by a seller to a buyer that reduces or cancels the amount owed from a previous invoice. Think of it as the opposite of an invoice — while an invoice requests payment, a credit note reduces or eliminates a payment obligation.
Credit notes are a standard part of business accounting. They create a proper paper trail for adjustments, which is important for your bookkeeping, tax returns, and audit readiness.
A credit note is not an invoice with a negative amount. It is a separate document type with its own numbering sequence and specific purpose. HMRC treats them differently for VAT accounting.
When to Issue a Credit Note
You should issue a credit note when:
- You overcharged the client — the invoice amount was higher than it should have been
- Goods were returned — the buyer sent back products that were damaged, faulty, or unwanted
- A discount was applied after the invoice — a retrospective price adjustment or volume discount
- Work was not completed — you invoiced for services that were not fully delivered
- An invoice error — wrong quantity, wrong price, or duplicate invoice
- A contract was cancelled — the order was cancelled after the invoice was issued
HMRC
If the original invoice was a VAT invoice, the credit note must also show the VAT adjustment. HMRC requires both the seller and buyer to update their VAT records to reflect the credit note.
What to Include on a Credit Note
A properly formatted credit note should contain:
- The words "Credit Note" — clearly labelled at the top of the document
- Your business name and address
- The client's name and address
- A unique credit note number — from a separate sequence to your invoices (e.g.
CN-001) - The date of the credit note
- A reference to the original invoice — the invoice number and date
- The reason for the credit — be specific (e.g. "Returned goods — 2x faulty units")
- The amount being credited — broken down by line item if applicable
- VAT details (if the original invoice included VAT) — the net amount, VAT rate, VAT amount, and gross total being credited
- The revised balance — what the client now owes after the credit is applied
Credit Note vs Invoice: Key Differences
| Invoice | Credit Note | |
|---|---|---|
| Purpose | Requests payment | Reduces or cancels payment |
| Amount | Positive (money owed to you) | Positive (money credited to client) |
| Numbering | Invoice sequence (INV-001) | Credit note sequence (CN-001) |
| Effect on VAT | Increases output VAT | Decreases output VAT |
| When issued | When goods/services are supplied | When an adjustment to a previous invoice is needed |
How Credit Notes Affect VAT
When you issue a credit note against a VAT invoice, both parties need to adjust their VAT records:
For the seller (you):
- Reduce your output VAT on the VAT return for the period the credit note was issued
- Keep the credit note alongside the original invoice in your records
For the buyer (your client):
- Reduce the input VAT they claimed on the original purchase
- Adjust their VAT return accordingly
The credit note must show the same VAT rate as the original invoice. If the original invoice had multiple VAT rates, the credit note should specify which items are being credited and at which rate.
If you regularly issue credit notes for the same reasons (e.g. returns), consider whether your quoting or invoicing process needs improvement. Frequent credit notes may indicate a pricing or quality control issue.
Credit Note Best Practices
- Issue promptly — do not wait weeks after agreeing a credit. Delays cause confusion in both your and the client's accounts
- Always reference the original invoice — without this, the credit note is harder to reconcile
- Use a separate numbering sequence — do not use your invoice numbering system for credit notes
- Keep copies — store credit notes alongside the related invoices, organised by date or client
- Communicate clearly — email the credit note to your client with a brief explanation, just as you would with an invoice
Create a Credit Note
Our free credit note generator handles the formatting, numbering, and VAT calculation for you.
Generate a professional credit note with all required fields — free, no sign-up.
Create a credit noteFrequently Asked Questions
What is the difference between a credit note and a refund?
A credit note reduces the amount owed — the buyer can use it against future purchases or request a cash refund. A refund is a direct return of money. A credit note is the accounting document that records the adjustment; a refund is the payment action.
Do credit notes need a unique number?
Yes. Credit notes should have their own sequential numbering system, separate from your invoice numbers. For example, CN-001, CN-002, and so on.
How does a credit note affect VAT?
A credit note reduces the VAT liability on the original transaction. The seller decreases the output VAT on their next VAT return, and the buyer must decrease the input VAT they claimed. Both parties need to adjust their VAT records.
Can I issue a credit note for a partial amount?
Yes. Credit notes can be issued for part of an invoice — for example, if one line item was overcharged or a partial refund is agreed. Just reference the original invoice and clearly state which items or amounts are being adjusted.
Related Tools
Related Guides
guide
What Must a UK Invoice Include?
A valid UK invoice must include your business name and address, the client's details, a unique invoice number, the date, a description of goods or services, amounts, and VAT information if you're VAT-registered.
Read moreguide
What Is a VAT Invoice? UK Guide to VAT Invoice Requirements
A VAT invoice is a document issued by a VAT-registered business that shows the price of goods or services, the VAT rate, and the VAT amount. It allows the buyer to reclaim the VAT as input tax. HMRC requires specific fields on a VAT invoice, including the supplier's VAT number and a breakdown of the tax.
Read morecomparison
Invoice vs Receipt: What's the Difference?
An invoice is a request for payment sent before the client pays. A receipt is proof of payment issued after the money is received. Both are essential business documents, but they serve different purposes at different stages of a transaction.
Read more