Key takeaways

  • A credit note is a document a seller issues to reduce or cancel an invoice, for example after a return, an overcharge or an agreed discount.
  • For VAT, a credit note must be issued within 14 days of the decrease, and for a price cut that clock starts when you refund the customer (VAT Regulations 1995, regulation 15C).
  • HMRC says a valid VAT credit note must show the number and date of the original VAT invoice, your VAT number, the amount credited excluding VAT and the VAT credited.
  • You cannot issue a credit note just because a customer has not paid; unpaid debts go through VAT bad debt relief after 6 months instead.
  • If both sides agree not to adjust VAT, the document should say 'This is not a credit note for VAT'.
  • The VAT adjustment goes in the VAT return period in which the refund is paid, not the period of the original sale (VAT Notice 700, paragraph 18.2.6).
  • Credit the VAT at the rate that applied to the original supply, even if the rate has since changed.

A credit note is a document a seller sends a customer to reduce or cancel an invoice already issued. You use one when goods come back, when you overcharged, or when you agree a lower price after the sale. If you are VAT registered, HMRC sets out what the credit note must show and expects it within 14 days of the refund.

What is a credit note?

A credit note is a negative invoice. It records that the customer owes you less than the original invoice said, or that you owe them money back.

You do not edit or delete an invoice once it has been sent. You issue a credit note against it, so both sets of books show the sale and the reduction. The customer takes the credit as a refund or against future invoices.

When should you issue a credit note?

Issue a credit note whenever the value of a sale goes down after you have invoiced it. Common reasons are:

  • the customer returns faulty or unwanted goods
  • you charged the wrong price or quantity
  • you agreed a discount, rebate or price reduction after the sale
  • the customer cancels part of a service you had already billed
  • you invoiced the wrong customer and need to cancel the invoice

HMRC’s manual at VATREC13040 (updated 16 January 2025) says a valid credit note must correct a genuine mistake or overcharge, or reflect an agreed reduction, and must give real value to the customer.

When can you not use a credit note?

You cannot use a credit note to write off a customer who has not paid. HMRC’s bad debt relief notice 700/18 says: “You may not issue a credit note simply because your customer has not paid you for your supply.”

For an unpaid invoice, VAT registered businesses claim bad debt relief instead. You must wait at least 6 months from the later of the due date and the date of supply, and claim within 4 years and 6 months.

What must a VAT credit note show?

A VAT credit note must carry the details in paragraph 18.2.3 of VAT Notice 700, last updated 25 June 2026.

DetailExample
Credit note number and issue dateCN-0042, 6 November 2026
Your name, address and VAT numberYour business details
Customer’s name and addressAs on the invoice
Description and quantity credited2 returned chairs
Amount per item and total, excluding VAT£200.00
VAT rate and VAT credited, in sterling20%, £40.00
Original VAT invoice number and dateINV-1187, 14 October 2026

If you cannot quote the original invoice, you must show HMRC another way that you accounted for VAT on the sale. Use the VAT rate that applied at the time of the original supply, even if it has changed since.

If you are not VAT registered, there is no set format. Follow the same layout as your invoices, which GOV.UK says need a unique number, both parties’ details, a description and the amounts. A sequential number series such as CN-0001 keeps the audit trail clear; see our guide to invoice numbering rules.

What is the 14-day rule?

The 14-day rule says a VAT credit note must be issued no later than 14 days after the decrease in price. It comes from regulation 15C of the VAT Regulations 1995.

Since 1 September 2019 a price cut only counts for VAT once there is a “real world” refund or an offset against money the customer owes. HMRC’s manual at VATSC06635 says the 14-day window starts when you refund the customer. HMRC says it will not repay VAT where credit notes do not meet the conditions.

How to issue a credit note

  1. Confirm the reason. Check it is a return, error or agreed reduction, not an unpaid debt.
  2. Find the original invoice. Note its number, date and VAT rate.
  3. Create the credit note in your software. Most packages, such as Xero, QuickBooks and Sage, raise one directly from the invoice and number it in sequence.
  4. Enter the credited items and amounts. Show the net amount, the VAT rate and the VAT credited separately.
  5. Refund or offset. Pay the customer back or apply the credit to an open invoice.
  6. Send it within 14 days of the refund. Email is fine if the customer agrees to receive it electronically.
  7. Keep a copy. HMRC expects you to keep it with your VAT records.

Our VAT calculator splits a gross figure into net and VAT if you need the numbers.

How does a credit note affect your VAT return?

A credit note reduces your output VAT, and your customer reduces the input VAT they reclaimed. Paragraph 18.2.6 of Notice 700 says the adjustment goes in the VAT period in which the refund is paid to the customer.

If the credit note corrects an error you already declared, use HMRC’s error correction rules in Notice 700/45 instead. Our guide on how to complete a VAT return shows where adjustments go in boxes 1 and 6.

If the customer can reclaim all the VAT, both businesses can agree not to adjust the VAT (Notice 700, paragraph 18.2.1). The document should then state “This is not a credit note for VAT”.

Credit note, debit note or proforma?

DocumentWho issues itWhat it does
Credit noteSellerReduces an invoice
Debit noteSellerIncreases an invoice after the sale
Proforma invoiceSellerQuotes a price before the sale

A debit note covers a price increase, and HMRC’s manual gives 14 days from the date the increase is agreed to issue it. A proforma invoice is not an accounting document at all.

Frequently asked questions

Is a credit note the same as a refund?

No. A credit note is the document that records the reduction. The refund is the money paid back, although a credit can also be set against future invoices instead.

Do I need to issue a credit note if I am not VAT registered?

There is no VAT rule requiring one, but you should still issue a credit note so your sales and the customer’s records match. Use your normal invoice layout and a separate number series.

How long do I have to issue a VAT credit note?

You must issue it within 14 days of the decrease in price. For a price reduction, HMRC says that period starts when you refund the customer.

Can I issue a credit note for a customer who will not pay?

No. HMRC does not allow credit notes for bad debts. Claim VAT bad debt relief once the debt is at least 6 months overdue.

Sources

Rates, thresholds and rules in this guide were checked against HMRC and GOV.UK guidance on 6 November 2026. Tax rules change, so check the current position on GOV.UK or with a qualified adviser before acting. This guide is general information, not personal advice.