What is a credit note and how to issue one
When to use a credit note to cancel or correct an invoice, what it must include, and how credit notes affect VAT.
Last updated 14/06/2026
A credit note is the proper way to cancel or reduce an invoice you’ve already sent, instead of deleting or editing it. It keeps your records (and your customer’s) accurate and auditable.
When to use one
- A refund or partial refund
- Returned goods or work not completed
- An overcharge or pricing error on the original invoice
- A cancelled order that was already invoiced
What a credit note should include
- That it’s a credit note (clearly labelled), with its own number and date
- Your details and the customer’s details
- A reference to the original invoice number it relates to
- The reason for the credit
- The amount being credited and, if VAT was charged, the VAT being credited
Showing it as a negative of the original lines (or the specific amount being reversed) makes it easy to reconcile.
Why not just edit the invoice?
Once an invoice is issued, changing or deleting it breaks the audit trail — and for VAT invoices your numbering must stay unique and sequential with no unexplained gaps (see VAT invoice requirements). A credit note leaves the original intact and records the correction properly.
Credit notes and VAT
If you charged VAT on the original invoice, a credit note reduces the output VAT you owe by the amount credited, and your customer reduces the VAT they reclaimed. That’s why the credit note needs to show the VAT element being reversed, not just the net amount.
Tip: until a dedicated credit-note document is added, you can produce one in the generator by describing the lines as a credit/refund of the original invoice (entered as negatives) and referencing the original invoice number in the notes.
Frequently asked questions
When should I issue a credit note?
When you need to cancel or reduce an invoice you've already issued — for example a refund, a return, an overcharge, or a cancelled order. A credit note corrects the record rather than deleting the original invoice.
Can I just delete or edit the original invoice instead?
No. Once an invoice has been issued (especially a VAT invoice) you should leave it in place and issue a credit note that references it, so your numbering and VAT records stay complete and auditable.
How does a credit note affect VAT?
If the original invoice charged VAT, the credit note reduces the VAT you owe by the amount credited. Both you and your customer adjust your VAT records accordingly. The credit note should show the VAT being credited.
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Open the free generator →General information, not tax advice. Always check current HMRC guidance or consult an accountant.