Credit Notes · Updated 2026-10-10

How to Write a Credit Note: What to Include, Numbering & Free Template

You overcharged a client by £180. The invoice has already been sent, maybe even recorded in your accounting. What now? You don't edit the original invoice and you definitely don't just delete it. You issue a credit note — a formal document that cancels or reduces part of an invoice you've already issued. This guide explains when to issue one, exactly what to include, how to number it, and the tax rules that apply in the UK, Australia, and Canada.

What a credit note is (and when you need one)

A credit note is a document you send to a client that reduces the amount they owe on an invoice — or cancels it entirely. Think of it as an invoice in reverse: where an invoice says "you owe me," a credit note says "you owe me less."

Issue a credit note when:

• You overcharged — a pricing error, double-counted hours, or the wrong rate on the invoice.
• Goods were returned or services were cancelled — the client sends items back or you agree to drop part of a project.
• You agreed a post-invoice discount — you offered 10% off to resolve a dispute after invoicing.
• Work was defective or incomplete — you're crediting the client for the portion that wasn't right.

Don't issue a credit note when a client simply can't pay. A bad debt isn't a pricing error — the supply still happened, and for VAT purposes a credit note is never the right tool there (see our guide to chasing late payments instead).

The golden rule: once an invoice has been sent, never silently edit or delete it. A credit note creates a clean, auditable paper trail — the original invoice, the credit note, and the net position. Tax authorities in every country we cover expect exactly this chain.

What to include on a credit note

A credit note mirrors an invoice's structure, with a few additions. Include:

1. The words "Credit Note" — clearly, at the top. This is not an invoice.
2. A unique credit note number — separate sequence from your invoices (more below).
3. Date of issue.
4. Your business name, address, and tax registration number (VAT number in the UK, ABN in Australia, GST/HST number in Canada).
5. The client's name and address.
6. The original invoice number and date — the single most important line. The credit note must link back to the invoice it's correcting.
7. A description of what's being credited — which items/services, quantities, and why ("Overcharge: 6 hours billed at £75 instead of £60 on invoice INV-2026-0042").
8. The amount credited, excluding tax.
9. The tax rate and amount credited — in your local currency. In the UK this must be in sterling even if the original invoice was in another currency.
10. The total amount credited, including tax.
11. How the credit will be settled — "applied against invoice INV-2026-0042," "held as account credit," or "refunded to your card ending 1234."

If both you and your VAT-registered client agree not to adjust the VAT on the credit (possible where the client claims full input tax), the document must clearly state "This is not a credit note for VAT" — and you must both still adjust the net figures on your VAT returns. When in doubt, adjust the VAT normally; the no-VAT-adjustment route is an edge case for experienced bookkeepers.

Credit note numbering: the rules

Run a separate sequential series for credit notes — never reuse or continue your invoice numbering on them. Common formats:

• CN-2026-0001, CN-2026-0002…
• CRN-0042…
• 2026/CN/001…

Three rules:

1. Sequential, no gaps. A gap in the sequence looks like a destroyed document during an audit.
2. Separate from invoices. An auditor should never find an "invoice" and a "credit note" sharing a number series — keep them distinct.
3. Reset deliberately. Most freelancers reset annually (CN-2027-0001). If you do, state the scheme in your bookkeeping notes.

Worked example: a credit note in full

Scenario: Ammar Shafi, a freelance web developer in Manchester, billed client "Brightline Ltd" £3,000 for a project (invoice INV-2026-0038, issued 2 October 2026, VAT at 20%). He later discovered he double-counted 4 hours at £75/hour = £300 of overcharge. He issues this credit note:

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CREDIT NOTE — No. CN-2026-0014 · Issued 10 October 2026

From: Ammar Shafi, 12 Deansgate, Manchester M3 2AY · VAT No. GB 123 4567 89 To: Brightline Ltd, 45 King Street, Manchester M2 4LQ

Credit against: Invoice INV-2026-0038, issued 2 October 2026 Reason: Overcharge — 4 hours double-counted at £75/hour

| Description | Amount (ex VAT) | |---|---| | Overcharge correction: 4 hrs × £75 | £300.00 | | VAT at 20% | £60.00 | | Total credited | £360.00 |

Settlement: Credited against invoice INV-2026-0038. New balance due: £3,240.00.

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That's the whole anatomy: header, linkage to the original invoice, reason, amounts with tax, and settlement instructions. Build yours in our invoice generator as a starting layout (set the amounts negative and relabel it), or in the receipt maker if you're crediting a paid receipt.

Timing and tax rules by country

UK (VAT)

HMRC treats credit notes seriously, because they reduce your output VAT. A valid VAT credit note must be issued within 14 days of the decrease in consideration (i.e. within 14 days of agreeing the reduction or paying the refund), must go to the customer, and must reflect a genuine overcharge or agreed price reduction — never a bad debt. Claim the VAT reduction on the VAT return for the period in which you issue the credit note. See our UK VAT invoice guide for the full rules on the invoices themselves.

Australia (GST)

The ATO calls it an adjustment note. If you issued a tax invoice and the price changes — overcharge corrected, goods returned — you must issue an adjustment note showing the original invoice reference, the adjustment amount, and the GST adjustment. Your client needs it to support their own GST credit adjustment. Record the adjustment in the BAS period when you become aware of it.

Canada (GST/HST)

Similarly, the CRA requires a credit note showing the original invoice number and date, the supplier's GST/HST registration number, the reason for the adjustment, and the tax amount adjusted. Issue it promptly when the price changes and adjust your next GST/HST return.

US (no VAT/sales-tax wrinkle)

There's no federal credit-note statute — it's purely good business practice and follows your accounting method. Issue the credit memo (the US term), link it to the invoice, and record it. Sales tax adjustments follow your state's rules; if the credited amount had sales tax on it, most states expect you to adjust the tax too.

How to settle a credit note: three options

Once issued, the credit has to go somewhere:

1. Apply it to the same invoice — simplest when the invoice is unpaid. The client pays the reduced balance.
2. Hold it as account credit — best for ongoing clients. The credit sits on their account and is deducted from the next invoice. Say so explicitly: "£360.00 credit available against future invoices."
3. Refund it — if the client already paid in full, send the money back to the original payment method and note the refund date and method on the credit note.

One process note: a credit note is the accounting document; a refund is the cash movement. Issuing a refund without a credit note behind it is one of the most common causes of reconciliation gaps. Always issue the document first.

Mistakes to watch out for

• Editing the original invoice — kills your audit trail. Issue the credit note.
• Credit-noting a bad debt — wrong instrument entirely; the supply happened, so no VAT/GST adjustment is due via credit note.
• Mixing credit notes into the invoice number series — keep CN- separate from INV-.
• Forgetting the original invoice reference — without it, the credit note is an orphan that neither your client nor a tax authority can trace.
• Issuing late for VAT purposes — in the UK, past the 14-day window you can lose the right to adjust output VAT in that period.

FAQ

Can I issue a credit note for an invoice that was never sent? If the invoice never went out, there's nothing to correct — just fix the draft and send it. Credit notes exist to correct documents the client has already received.

Does a credit note need the client's signature? No. It's your document acknowledging the reduction. You issue it; the client applies it. Keep proof you sent it (email is fine).

Can a credit note be for the full invoice amount? Yes — a full credit effectively cancels the invoice. State "Credit in full against invoice INV-2026-0038" so the position is unambiguous.

What's the difference between a credit note and a debit note? Mirror images. A credit note reduces what the client owes (you overcharged); a debit note increases it (you undercharged). Learn the full comparison in our credit note vs credit memo vs refund guide.

Do I need a credit note for a small correction, like £5? For a few pounds, most freelancers just adjust the next invoice with a clear line item — but for VAT/GST-registered businesses, the formal credit note (or adjustment note) is still the compliant route.

How long should I keep credit notes? Follow your invoice retention rules: 6 years in the UK (HMRC), 5 years in Australia (ATO), 6 years in Canada (CRA). They're tax documents — file them with the invoices.