Credit notes

A credit note is an invoice pointing the other way. It carries the same kind of detail — who, what, how much, what tax — but the amount is one the client no longer owes. Together with the invoice it corrects, it states what was actually billed, and the two stay side by side in both your records and theirs.

Why not just fix the invoice

Because by the time you notice, the invoice is rarely only yours. The client 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, their records and yours now 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 letter of it. A correction is a document of record in its own right, not an edit to an old one. The same logic is why a cancelled invoice keeps its number rather than being deleted — invoice numbering covers what a gap in the sequence costs.

The exception is an invoice that never reached anybody. If 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 was void is usually enough. Once they have it, correct it in the open.

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.

One thing it is not for: a client who simply has not paid. An unpaid invoice is still a correct invoice. Crediting it would say the money was never owed, which is the opposite of what you want on record 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 shape is nearly always the same, and the one field that matters everywhere is the last: the number and date of the invoice being corrected. A credit note that does not say what it corrects is a negative number floating free.

Add a one-line reason as well. HMRC does not list it among the fields, but the notice does say your records must make clear "the nature of the adjustment and the reason for it", and a reason printed on the document is the cheapest place to keep it. "Five hours billed in error on INV-2026-041" answers the question before anybody asks.

A partial credit, worked through

An invoice for 30 hours at 80 an hour, with VAT at 20 per cent. The client points out they signed off 25 hours, not 30, and they are right.

The tax is credited at the rate on the original invoice, not at whatever rate applies today — the credit note is undoing part of that invoice, so it has to undo it on the same terms. 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). And the original stays exactly as it was. Nobody edits INV-2026-041; 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. That is the cleaner choice when several things were wrong at once — the entity and the address and the hours — because a partial credit correcting three fields is harder to follow than a full credit and a new invoice that is simply right. For one wrong figure, a partial credit is shorter and says exactly 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, refund it.

Where you offset, show it on the next invoice as its own line — "Credit note CN-2026-003 applied" — rather than quietly lowering a price. A lower price with no reference reads as a discount you might be asked for 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 never 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. What does not work is reusing 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. There is no difference in what either has to do. A debit note is the reverse: a document that increases what the client owes on an earlier invoice, for example when a price was agreed upwards after the event. It is far rarer, because most people simply send a second invoice for the extra.