What is a credit note?

When do you issue a credit note?

Whenever an invoice turns out to be wrong or the customer is entitled to pay less: goods returned, a price agreed down after a dispute, work not completed, or a simple error in the original. The invoice stays exactly as issued, and the credit note records the reduction against it.

This matters because an invoice, once sent, is part of the record. Editing it after the fact means the customer's copy and yours disagree, and if VAT has already been reported the return is now wrong too. A credit note leaves the trail intact.

A credit note carries the same details as an invoice: a number, the date, the customer, the original invoice it relates to, the amounts net and VAT, and the reason. It can be offset against the original invoice, against a future one, or refunded in cash.

What does it look like in practice?

An electrician invoices a customer £1,200 plus £240 VAT, £1,440 in total, for a rewire. The customer disputes two hours and they agree to knock off £150 plus VAT.

The electrician issues credit note CN-0009 for £150 plus £30 VAT, £180, referencing the original invoice. The customer pays £1,260. In the books the invoice still shows £1,440, the credit note shows £180 against it, and the balance is nil once paid.

On the VAT return the output VAT on that sale is £210, not £240, because the credit note reduces it. If the invoice had already been on a previous return, the £30 simply reduces the next one.

How is it different from a refund?

A credit note is the paperwork; a refund is the money. A credit note might be settled by refund, but it is just as often settled by the customer paying less, or by being set against their next invoice. Issue the credit note first and decide how to settle it second.