Credit Note: What It Is and HMRC's Rules for a Valid One

Think of it as a negative invoice. It doesn't delete the original; it sits alongside it so both your records and your customer's show what changed and why. The rules below are HMRC's, from the VAT guide, and they matter because HMRC won't make any repayment where a credit note doesn't meet them.

When you'd issue one

• You overcharged, or the invoice had an error in the amount of VAT.
• The customer returned goods, or you replaced them with cheaper ones.
• You allowed a credit or a contingent discount, such as a volume discount earned later.
• A prompt payment discount was taken up within the agreed time.
• The VAT rate changed and you'd already invoiced at the old rate.

What a valid credit note must show

To be valid for VAT, VAT Notice 700 says it must give value to the customer (a real entitlement to a refund or to offset against future supplies) and clearly show:

Detail	Why
Identifying number and date of issue	Links it into your sequence of documents
Supplier's name, address and VAT registration number	Shows who's giving the credit
Customer's name and address	Shows who receives it
A description of the goods or services credited	Identifies what the credit relates to
Quantity and amount for each description	Shows how the credit is made up
Total credited, excluding VAT	The net reduction
Rate and amount of VAT credited, in sterling	The VAT adjustment
Number and date of the original VAT invoice	Ties it back to the sale (or other proof if goods can't be matched to one invoice)

Credits for zero-rated or exempt items must be totalled separately, with a clear note that no VAT credit has been allowed for them. And the VAT rate on a credit note is the rate in force at the tax point of the original supply, not today's rate.

The timing rules

Situation	Deadline
Credit note after a refund is paid	Within 14 days of the refund payment
Debit note after an agreed price increase	Within 14 days of agreeing the increase
Credit note because of a change in VAT rate	Within 45 days after the change

A credit note without a VAT change

Sometimes you and a customer who can reclaim all the VAT agree not to adjust the original VAT charge. HMRC allows that, but the document should then say "This is not a credit note for VAT", and you both still need to adjust your records of outputs and inputs for your VAT Returns.

Recording it in your VAT return

1. When you issue a credit note, adjust your records of taxable supplies and your output tax, making the reason clear in your accounts.
2. Make the adjustment in the VAT period when the price decreased, which for refunds is the period the refund is paid.
3. If the original invoice overstated VAT and you've already declared it on a return, don't use a credit note alone: correct it using the error correction method in VAT Notice 700/45.
4. Customers who receive a credit note adjust their input tax and keep a record of the credit, or cross-reference the filed credit notes.

Prompt payment discounts: you can skip the credit note

If you offer a discount for paying early, you don't have to issue a credit note when it's taken. Instead, the original invoice must show the discount terms and a statement that the customer can only recover, as input tax, the VAT paid to the supplier. HMRC recommends invoice wording that states the discount percentage and the number of days it applies for, says that no credit note will be issued, and reminds the customer to recover only the VAT they paid. Without a credit note, the original invoice plus records showing what was received, such as a bank statement, are the evidence for the VAT adjustment.

Returned and replaced goods

VAT Notice 700 gives you a choice when you replace returned goods with similar ones. You can let the original VAT charge stand and supply the replacements free of charge without charging VAT again, or cancel the original charge with a credit note (if you'd issued a VAT invoice) and charge VAT on the replacements. If the replacement is cheaper, you may reduce the VAT with a credit note; if it's dearer, the extra is charged in the usual way. Whichever route you choose, keep the paperwork consistent, because HMRC expects the accounts to show the nature of each adjustment and the reason for it.

If you send invoices regularly, invoice reminder tools can take the chasing off your plate.

Credit notes, debit notes and pro forma invoices

A debit note is the opposite of a credit note: it increases what the customer owes after an undercharge or an agreed price rise, with similar required details. A pro forma invoice is different again: it's a quote-style document before a sale, not a tax document, so there's nothing to credit. If you're not sure whether you have to invoice at all, see whether issuing an invoice is a legal requirement.

The verdict

Never edit or delete an invoice you've already sent. Issue a credit note that quotes the original invoice number and date, shows the VAT credited in sterling, and goes out within 14 days of any refund. Use your accounting software's credit note feature so the numbering and VAT adjustment happen automatically.

Credit notes and invoices flow through your books, and this list of AI accounting tools looks at AI tools that automate that side.

Frequently asked questions

What is a credit note?

A document a supplier issues to reduce or cancel what a customer owes on an earlier invoice, for example after an overcharge, a return or an agreed discount.

What must a credit note include for VAT?

A number and date, the supplier's name, address and VAT number, the customer's details, a description, quantities and amounts, the net total, the VAT rate and amount in sterling, and the original invoice number and date.

What is the deadline to issue a credit note?

For VAT, within 14 days of the refund being paid to the customer, or within 45 days after a change in VAT rate.

Can I just amend the original invoice instead?

No. Corrections go through a credit note or a supplementary invoice that references the original invoice, so the change works through your VAT records.