Credit notes

A credit note works like an invoice in reverse. It carries the same kind of detail (who, what, how much, what tax), but the amount is one the client no longer owes. Read together with the invoice it corrects, it shows what was billed in the end, and both documents stay in your records and theirs.

Why not just fix the invoice

The client may already have acted on the invoice you sent. By the time you notice the mistake, they may have entered it in their system, approved it for payment, or claimed back the tax on it. If you change the figure on your copy, your records and theirs describe two different documents with the same number, and nothing on either explains why.

In the EU the rule is written down. Article 219 of the VAT Directive (2006/112/EC) says that "any document or message that amends and refers specifically and unambiguously to the initial invoice shall be treated as an invoice". That is the wording as legislation.gov.uk records it at 2020. The EU has amended the Directive's invoicing rules since, under the VAT in the Digital Age package, so check the current text on EUR-Lex before relying on the exact wording. In practice, it means a correction is a record in its own right. For the same reason a cancelled invoice keeps its number rather than being deleted, and the guide to invoice numbering covers what a gap in the sequence costs.

The exception is an invoice that never reached the client. Say you caught it before it was sent, or it went to the wrong address and the client never saw it. A note in your own records saying it's void is usually enough. Once they have it, correct it with a credit note.

When you need one

• You overcharged. Wrong hours, wrong rate, a line billed twice. The credit is for the difference.
• You agreed a reduction after the invoice went out. A goodwill discount, a part of the job that was dropped, a delivery that was late enough to be worth less.
• The whole invoice is wrong. Wrong client, wrong entity, wrong currency, or a job that was cancelled. The credit is for the full amount, and a new invoice follows if one is still owed.

Don't credit an invoice because the client hasn't paid it. An unpaid invoice is still a correct invoice. Crediting it would record that the money was never owed, which undermines you if you end up chasing it.

What goes on a credit note

The UK is a useful reference because HMRC publishes the list. Section 18.2.3 of VAT Notice 700 says that a credit note which adjusts VAT must show:

• its own identifying number and date of issue
• the name, address and VAT registration number of the supplier
• the name and address of the customer
• a description of the goods or services being credited
• the quantity and amount for each description
• the total amount credited, excluding VAT
• the rate and amount of VAT credited
• the number and date of the original invoice

The same notice says the credit note has to reflect "a genuine mistake or overcharge or an agreed reduction in the value of the supply", and that it must be "issued within 14 days of the refund payment being made to the customer". Other countries word it differently, but the requirements are usually similar. The field that matters everywhere is the last one: the number and date of the invoice being corrected. Without it, the reader can't tell what the credit applies to.

I'd add a one-line reason as well. HMRC doesn't list it among the fields. However, the notice does say your records must make clear "the nature of the adjustment and the reason for it", and the document itself is the easiest place to keep it. For example, "5 hours billed in error on INV-2026-041" answers the question before anyone asks.

A partial credit, worked through

Say you invoiced 30 hours at 80 an hour, with VAT at 20%. The client points out they signed off 25 hours, not 30, and they're right. The credit is for the 5 hours in between.

Credit the tax at the rate on the original invoice. The credit note reverses part of that invoice, so it has to do so on the same terms, whatever rate applies today. In the UK that is the written rule: HMRC says the rate to use is "the one which was in force at the time of the tax point of the original supply" (section 18.2.5). The original stays as it was. INV-2026-041 isn't edited, and the two documents read together give the corrected figure.

The alternative is to credit the full 2,880 and issue a fresh invoice for 2,400. I recommend that route when several things were wrong at once, say the entity, the address and the hours. A partial credit correcting three fields is harder to follow than a full credit and a new, correct invoice. For one wrong figure, a partial credit is shorter and shows what changed.

If they have already paid

Then the credit is money you owe them, and there are two ways to settle it: refund it, or take it off the next invoice. HMRC's wording is that the credit must represent a genuine entitlement for the customer, "either to be refunded or offset against the value of future supplies". Offsetting only works when there is a next invoice and they agree to wait for it. If the work has ended, I'd refund it.

If you offset, be sure to show it on the next invoice as its own line ("Credit note CN-2026-003 applied") rather than lowering a price. A lower price with no reference looks like a discount, and the client may expect it again.

Numbering credit notes

HMRC asks for an identifying number, not a particular scheme. Many businesses run a separate series for credits, such as CN-2026-001, so a credit can't be mistaken for an invoice at a glance. Others number credits in the same sequence as invoices. Either works as long as every number is used once and the credit names the invoice it corrects. Don't reuse the number of the invoice being cancelled.

Credit memo, credit note, debit note

A credit memo is the same document under the name more common in the US. Credit note is the usual term in the UK, the EU and most of the Commonwealth, and both do the same job. A debit note is the reverse: a document that increases what the client owes on an earlier invoice, for example when a higher price was agreed after the event. Debit notes are much rarer, because most people send a second invoice for the extra.