What is a credit note and when do you issue one?

A credit note cancels or reduces an invoice you have already issued. You use one instead of deleting or editing the original, because the original has to stay in the record.

You overcharged, the client returned something, or you raised the invoice against the wrong entity. The fix is never to quietly delete invoice 1043 — that leaves a gap in your sequence and an unanswerable question in an audit.

Instead issue a credit note referencing invoice 1043, for the amount being cancelled, with its own number in its own series. If tax was charged on the original, the credit note reverses that tax too.

Then, if needed, raise a fresh invoice with the correct details and the next number in the invoice series.

What it is for

A credit note reverses an invoice, in whole or in part, after the invoice has been issued. It exists because an issued invoice cannot simply be deleted once it has entered two sets of books and, if you are tax-registered, declared tax.

Think of it as the correction mechanism for a system that deliberately does not allow rubbing things out.

When you need one

• The job was cancelled after you invoiced.
• You overcharged, or billed for something not delivered.
• You agreed a discount or a goodwill reduction after the fact.
• Goods were returned.
• The invoice went to the wrong legal entity.
• The tax rate applied was wrong.

You do not need one for an invoice that was never sent, or for an undercharge — that is a second invoice, not a credit.

What goes on it

Essentially the same fields as an invoice, plus two:

• The words "credit note", clearly, so it is not mistaken for a bill.
• Its own sequential number, from a credit-note sequence or your invoice sequence — consistently one or the other.
• A reference to the original invoice by number and date. Without this it is an orphan document.
• The reason for the credit, briefly.
• The amount, and the tax reversed, shown separately as on the invoice.

Partial credits are normal

Crediting £400 of a £2,400 invoice is one credit note for £400 referencing the original. You do not cancel the whole thing and reissue. The client's records then hold an invoice for £2,400, a credit for £400, and a balance of £2,000 — which is exactly what happened, and reconciles cleanly.

The tax effect

A credit note reverses the tax as well as the net. If you declared £820 of tax on an invoice you have now credited in full, that £820 comes back in the period the credit note is issued — not by amending the earlier return. Which period the adjustment lands in matters at year end, and it is the reason the date on a credit note is not cosmetic.

Credit note versus refund

They are different events and either can happen without the other. A credit note adjusts what is owed. A refund moves money. Credit an unpaid invoice and nothing needs to move; credit a paid one and you also owe a refund. Keep the two records separate — the credit note documents the adjustment, the bank record documents the payment.

What not to do instead

Do not delete the invoice, do not edit it in place, and do not net the correction off the next invoice as a mystery negative line. The last one is common and creates an invoice whose total nobody can reconcile to anything. Editing an invoice after sending covers the alternatives properly.

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