Credit invoice: what a credit note must show, with a template

A credit invoice, more often called a credit note, is a document a seller issues to reduce or cancel an invoice already sent. It tells the customer that they owe less than the original invoice said. If the customer has already paid, it records the money the seller returns or carries forward.

This guide covers when to issue a credit note, the fields it must carry in the UK, why the German word "Gutschrift" is a trap, and a worked example with VAT.

What is a credit invoice?

A credit invoice is a credit note: a document that cancels all or part of an earlier invoice. The seller issues it, and the customer books it against the original invoice. The credit invoice template and the credit note template are the same document under two names. Related: edit, reissue or credit an invoice, deposit invoices.

A refund is not a credit note. A credit note is the paperwork. A refund is the money moving back. A seller can issue a credit note and then refund the customer, or leave the credit on the account for the next invoice.

When should you issue a credit note?

Issue a credit note when the amount on a sent invoice was wrong or has changed. Six cases cover almost every request.

1. Overcharge. The invoice shows a higher price than agreed.
2. Returned goods. The customer sent back part or all of an order.
3. Faulty work. The seller agrees to a price reduction.
4. Cancelled order. The job did not go ahead after the invoice was sent.
5. Duplicate invoice. The same job was billed twice.
6. Agreed discount after the fact. The two sides settle on a lower price.

Do not delete or overwrite the original invoice. Invoice numbers must stay sequential and unique. A credit note leaves the original in place and corrects it on paper.

What must a credit note show in the UK?

A UK VAT credit note must carry specific details. HMRC lists them in VAT Notice 700, paragraph 18.2.3. A credit note must show:

• an identifying number and the date of issue
• the supplier's name, address and VAT registration number
• the customer's name and address
• a description identifying the goods or services credited
• the quantity and amount for each description
• the total amount credited, excluding VAT
• the rate and amount of VAT credited, in sterling
• the number and date of the original VAT invoice

HMRC's VAT manual adds the conditions for a valid VAT credit note. It must be addressed to the customer. It must correct a genuine mistake or overcharge, or reflect an agreed reduction in value. It must not be issued to write off a bad debt. HMRC requires it to be issued within 14 days of the decrease in consideration.

The bad debt rule matters. A credit note is not a way to give up on a client who will not pay. Unpaid invoices follow a separate VAT process.

Credit note template (UK, with VAT)

Copy this layout for a UK credit note. The numbers match the worked example below.

The reason line is good practice rather than a quoted HMRC requirement, but it settles most queries before they start.

Worked example: crediting part of an invoice

Ava Design billed Northway Foods £1,000 plus £200 VAT, a total of £1,200, for two logo variants. The client paid nothing yet. Variant B was never delivered, and both sides agree a £400 reduction.

The UK standard VAT rate is 20%, according to GOV.UK VAT rates. The seller reduces its output VAT by £80 on its VAT return for the period of the credit note. The customer reduces its input VAT reclaim by the same amount.

If the client had already paid the full £1,200, the credit note creates a £480 credit. The seller refunds £480 or deducts it from the next invoice.

Credit invoice vs "Gutschrift" in Germany

In German, a "Gutschrift" is not what an English speaker means by a credit note. Section 14 of the German VAT Act (UStG) uses "Gutschrift" for an invoice issued by the customer on the supplier's behalf, known as self-billing. Section 14(4) UStG requires the word "Gutschrift" on such a document.

A seller who wants to cancel or reduce an invoice in Germany uses other documents. A "Stornorechnung" cancels the original invoice. A "Rechnungskorrektur" replaces it with a corrected one. Some businesses issue a "Gutschrift" for a price reduction anyway, but then the document is a credit in the everyday sense and not a self-billed invoice. Say which in the text.

Getting the VAT right on corrections matters. Section 14c UStG says an entrepreneur who shows more tax than the law requires also owes the excess. If the tax on an invoice was too high, correct it toward the customer. Do not simply leave it.

Worked example: cancelling a whole invoice

Sometimes the whole invoice is wrong. A German supplier, Elektro Weber, billed €1,190 including VAT for a job that the customer then cancelled before any work started. Elektro Weber issues a Stornorechnung that mirrors the original with negative amounts.

The Stornorechnung names the original number and date, and states that it cancels that invoice in full. The 19% standard rate comes from section 12 UStG. The supplier reverses the output VAT of €190 and the customer reverses any input VAT it claimed.

What if you charged too much VAT?

A credit note can fix a VAT error, but timing and the customer's position matter. Under section 14c(1) UStG, an entrepreneur who shows more tax than the law requires owes the excess, until the invoice is corrected toward the customer. Fixing it means issuing a corrected invoice or a cancellation and a new invoice, and making sure the customer adjusts any input VAT claimed. In the UK, a credit note for a pricing mistake follows the same 14-day expectation from HMRC. If the VAT treatment is unclear, ask an accountant before you issue the correction.

Credit note vs refund vs cancelled invoice

These three terms are often mixed up. The table separates them.

If the invoice has not been sent yet, edit or void it. Once it has gone to the customer, issue a credit note.

Numbering and records

Credit notes need their own unique sequential numbers, usually in a separate series with a prefix such as CN. Link each one to the original invoice number and date, which UK rules require. Keep both documents for your accounts. Your record-keeping period depends on your country and your tax authority.

US credit memos

A US credit memo works the same way as a UK credit note. The seller issues it to reduce a customer's balance. The United States has no single federal credit memo format. Sales tax on the credited amount follows state rules, so a seller who collected sales tax usually reverses the tax with the credit. Check your state's revenue department. This guide does not give tax advice.

A good US credit memo shows the memo number, the date, the original invoice number, the reason, the amount and any tax credited.

Common credit note mistakes

• Issuing it too late. HMRC expects a UK credit note within 14 days of the decrease in consideration.
• Leaving out the original invoice number. Without it, the credit cannot be matched.
• Using a credit note for bad debt. HMRC says a valid credit note is not issued to write off a bad debt.
• Crediting net only. A VAT credit note must show the VAT credited as well.
• Deleting the original invoice. Keep it. The credit note corrects it.

Make one in a minute

A credit note must match the invoice it corrects, line by line. Invoqk's credit note generator builds a credit note from a plain description, links it to the original and calculates the VAT credit for you.