Sometimes an invoice goes out and then the number on it stops being right. A customer sends part of the order back, or you spot last year’s price still on it.
It happens to anyone who sends invoices often enough. You fix it with a credit note.
A credit note is basically an invoice running in reverse.
It points back to an invoice you’ve already sent and takes some of the amount off, or all of it. You send them to your customers, and your suppliers send them to you when they need to correct one of their own invoices.
Returns are the classic reason to send one. Someone keeps most of the order, sends the rest back, and the invoice has to catch up. You’ll also need one when you spot a mistake, like a wrong price, a wrong quantity, or the same service listed twice because it was a long week.
If the mistake affects the whole invoice, like the wrong VAT rate or the wrong customer, it’s usually cleaner to credit the full amount and send a fresh invoice.
Sometimes the price drops because you and the customer agree it should.
Maybe the delivery turned up late, maybe you’re making up for a complaint, or maybe they’ve earned a volume discount later in the year. Those price drops get a credit note too.
And an order cancelled after you’ve invoiced it gets a credit note for the full amount, which closes the invoice.
When a customer simply hasn’t paid, the invoice stays as it is and you just follow up on the payment, because credit notes are only for mistakes and agreed price changes.
If you’re VAT-registered and six months have passed since the payment was due, you can claim back the VAT on that sale through HMRC’s bad debt relief, which has its own rules.
It’s tempting to open the old invoice, change the number and send it again like nothing happened.
Once an invoice is out, though, it stays in your records the way it was sent and that goes for the wrong ones too. Your customer may have filed it in their own books already. A credit note sits next to the original and shows what changed, so both sets of records still agree.
The credit note changes what your customer owes, and you settle the money as a separate step.
You can refund the customer, or you can take the amount off what they owe you, on the invoice you’re crediting or on the next one. If they haven’t paid yet, taking it off is the easiest.
If they have, most people will expect their money back, although a regular customer might be happy to use it on their next order.
Once your Ampere business account is approved, a refund by UK Faster Payments or SEPA transfer costs £0. You can send your invoices from the same account too, so the invoice and the refund sit in one place.
Pull up the original invoice first. The credit note has to point back to it, so you’ll be copying a few details across.
Put “Credit note” clearly at the top so nobody mistakes it for a new invoice, and give it its own number. A lot of businesses run a separate sequence for credit notes, like CN-001, CN-002 and so on.
If you’re VAT-registered, your credit note needs:
- its own number and the date you issue it
- your company’s name, address and VAT registration number
- your customer’s name and address
- the number and date of the original invoice
- a description of the goods or services you’re crediting
- the reason for the credit, like returned goods or a price mistake
- the amount credited, excluding VAT
- the VAT rate and the amount of VAT credited, in pounds sterling
If you’re not VAT-registered, use the same layout and leave out the VAT details.
Then send it to the customer and settle the money the way you agreed. Record it in your books against the original invoice and keep a copy.
If you’re VAT-registered, send it within 14 days of the day you refund the customer or take the amount off their bill. The change goes on the return that covers that day, and the credit note stays in your records for at least six years.
When a supplier sends you a credit note, lower what you reclaim for that purchase by the tax shown on it.
If you run a shop or sell to the public and didn’t need to give an invoice for the sale, you only need a credit note when a VAT-registered customer asks for one.
