What Is a Credit Note? When and How to Issue One

A credit note (also called a credit memo) is a document a seller issues to reduce or cancel an amount on an invoice already sent. Think of it as a negative invoice: it tells the customer they owe less, or that they're owed money back.

When to issue one

• Mistakes: wrong price, wrong quantity, wrong customer, duplicate invoice
• Returns: the customer sent goods back
• Damaged or short deliveries
• Discounts agreed after invoicing, such as a goodwill reduction
• Cancelled orders that were already invoiced
• Overpayments you'll hold on account rather than refund

Why not just edit the invoice?

Once an invoice has been sent, it's part of your records and the customer's. Editing it creates two different versions of the "same" document, which confuses both sets of books and, where you're VAT-registered, breaks the audit trail tax authorities expect. The correct method is:

1. Leave the original invoice as it is
2. Issue a credit note that references it
3. If needed, issue a new, correct invoice

What a credit note should show

• The title Credit note
• A credit note number, in its own sequence (e.g. CN-0004)
• The date of issue
• Your details and the customer's details (as on the invoice)
• The original invoice number and date
• What's being credited and why
• The amount credited, including any tax adjustment
• The VAT or GST being reversed, if applicable

Example

CREDIT NOTE CN-0004, 24 August 2026 Against invoice INV-0132 of 14 August 2026 Returned: 3 × ceramic planters, damaged in transit @ £22.00 = £66.00 VAT at 20%: £13.20 Total credit: £79.20

The customer's balance on INV-0132 falls by £79.20. If they'd already paid in full, you either refund it or hold it as credit against their next order. Say which on the credit note.

Full vs partial credit notes

• Full: cancels the whole invoice. Use this for invoices sent in error or to the wrong customer.
• Partial: reduces the invoice by a portion. Use this for returns, discounts or pricing errors.

Tax implications

If you charged VAT or GST on the original invoice, the credit note reduces the output tax you owe, and the customer reduces the input tax they claim. That's why the credit note must show the tax being reversed and reference the original invoice. In the UK, HMRC's rules on credit notes follow the same logic as VAT invoices. See UK VAT invoice requirements.

In the US, if sales tax was collected and the sale is refunded or reduced, you'll generally adjust the tax on your next return according to your state's rules.

In your books

A credit note reverses revenue (and any tax) from the original sale. In accounting software, it's usually applied directly against the invoice, leaving either a reduced balance or a credit on the customer's account.

Credit note vs refund vs debit note

• Refund: the actual money going back. A credit note may lead to a refund, or not.
• Debit note: sometimes issued by a buyer to request a credit, or by a seller to increase an amount previously invoiced. Usage varies by country.
• Void: some software lets you void an unsent invoice. If it's never been sent, voiding is fine. If it has, use a credit note. More in how to correct or void an invoice.