How to issue a credit note

What a credit note is

A credit note is a document that reduces, or cancels, an amount you've already invoiced. It's effectively a negative invoice. It leaves a clear trail: the original invoice still exists, the credit note shows what changed and why, and the two together give the correct figure.

When to use one

• You overcharged, for example by billing 9 hours instead of 8 or using the wrong rate.
• Work was cancelled or not completed after you invoiced.
• You agreed a discount or a goodwill reduction after the invoice went out.
• You invoiced the wrong client and need to cancel it entirely.

If you undercharged, you don't need a credit note. Just send a further invoice for the difference with a new number, referring to the original.

Why not just edit the invoice?

Once an invoice has been sent, your client may already have entered it in their accounts. If you change the figures but keep the number, you now have two different documents with the same number, which confuses everyone and undermines the unique numbering your records rely on. If an invoice is still a draft and hasn't been sent, editing it is fine.

Some small businesses with non-VAT clients agree to "void and replace": mark the original as cancelled and issue a new invoice with a new number. That's acceptable if both sides agree and you keep the cancelled one. A credit note is the cleaner, more widely accepted method.

What to put on a credit note

• The words "Credit note" clearly at the top
• A unique credit note number (many people use a separate sequence such as CN-001)
• The date of issue
• Your name, address and contact details, and the customer's
• The original invoice number and date it relates to
• A description of the reason ("Overtime billed at incorrect rate, week 05/10/2026")
• The amount credited, and the VAT credited if you're VAT registered

If you're VAT registered, HMRC's VAT Notice 700 sets out requirements for credit notes that adjust VAT, and the credited VAT must be accounted for correctly. Check the notice.

Worked example

Invoice 00061 billed Saturday at 8 hours × £25.78 = £206.25, but you only worked 4 hours (4 × £25.78125 = £103.13). The credit note:

The credit is the difference between the two rounded line amounts (£206.25 − £103.13 = £103.12), so the corrected figures add up exactly. The client now owes the original total less £103.12. If they've already paid in full, you either refund the £103.12 or, if they agree, deduct it from the next invoice.

Cancelling a whole invoice

Issue a credit note for the full amount, referring to the original. The invoice and credit note together net to zero. Don't reuse the cancelled invoice number. A gap-free sequence that includes a cancelled invoice is better than a reused number.

Keep both

Keep the original invoice and the credit note together in your records for the same period you keep invoices. See our guide to how long to keep invoices.

Worked example: a VAT credit note for a discount

You invoiced a VAT-registered client £1,000.00 plus £200.00 VAT, a total of £1,200.00. After the invoice went out, you agree a £100.00 discount on the net price. The credit note reduces the net by £100.00 and the VAT by 20% of that, which is £20.00, so the total credited is £120.00. The client now owes £1,200.00 − £120.00 = £1,080.00. If you are not VAT registered, the credit note is simply for the £100.00.

Credit notes on CIS invoices

If the original invoice had a CIS deduction, a credit note that reduces the labour also reduces the deduction. Credit £100.00 of labour and, at 20%, the deduction falls by £20.00, so the cash the contractor owes you falls by £80.00. The contractor's payment and deduction statement is the official record of what was deducted, so check the next statement reflects the change. See CIS payment and deduction statements.

Refund, offset or leave it?

• The client has not paid yet: the credit note simply reduces what they owe. Send both documents together.
• The client has paid in full: either refund the credited amount or, if they agree in writing, take it off the next invoice.
• You are unsure whether to credit at all: if the figure is in dispute, talk to the client first. Then credit what you agree. See how to chase an unpaid invoice for polite wording when a dispute is delaying payment.

Use the overtime calculator to recheck a line before you decide how much to credit.