Credit note template UK: what to include and how to issue one

Made a mistake on an invoice? Agreed a refund with a customer? Then you need a credit note. For UK sole traders and small tradespeople, issuing a credit note the right way keeps your accounts clean, satisfies HMRC, and makes sure your VAT return stays accurate.

This guide walks you through exactly what a credit note is, what it must contain under HMRC rules, and how to use one in practice — whether you are VAT-registered or not.

What is a credit note?

A credit note is a document you send to a customer to reduce or cancel the amount they owe you. Think of it as the reverse of an invoice. If you sent an invoice for £500 but later agree to knock £100 off due to a complaint or returned materials, you issue a credit note for £100.

You should never simply delete or edit an already-sent invoice. That creates a gap in your records that HMRC can question. Instead, issue a credit note that formally reduces the original amount. Both documents then sit in your accounts and give a clear audit trail.

Situations where tradespeople commonly need credit notes:

• A customer complains about part of the work and you agree a partial refund
• You overcharged by mistake on an invoice
• Materials were returned and you want to refund the cost
• A job was cancelled after you had already raised an invoice
• A duplicate invoice was sent in error

What must a UK credit note include?

HMRC has specific requirements for credit notes, especially if you are VAT-registered. Here is the full checklist.

For all UK businesses (VAT-registered or not)

• The words "credit note" clearly at the top of the document
• A unique credit note number (sequential, separate from your invoice series)
• The date the credit note is issued
• Your business name and address
• The customer name and address
• A description of what is being credited
• The original invoice number the credit note relates to
• The total amount being credited

Additional requirements if you are VAT-registered

• Your VAT registration number
• The VAT rate applied to the credit (e.g. 20%)
• The net amount being credited (excluding VAT)
• The VAT amount being credited
• The total amount including VAT

How to number credit notes

Use a separate sequential series from your invoices. Many tradespeople use a prefix like CN-001, CN-002, or CN-2026-001. The important thing is that the numbers are unique and never reused. If you use invoicing software, this is handled automatically. If you manage invoices manually, keep a simple log.

HMRC does not prescribe a specific format, but numbering must be sequential with no gaps. You cannot issue CN-001 and CN-003 without CN-002 sitting somewhere in your records.

When to issue a credit note

For VAT-registered businesses, HMRC guidance says a credit note should be issued within 14 days of making the refund or agreeing the adjustment. Issue it as soon as possible so your VAT return picks up the adjustment in the correct period.

For non-VAT-registered sole traders, there is no strict legal deadline, but good practice is to issue it at the same time you process any refund so your books stay tidy.

How a credit note affects your VAT return

If you are VAT-registered, the VAT on a credit note reduces the output tax you owe HMRC. You include it in Box 1 of your VAT return as a reduction. If you already paid that VAT in a previous quarter, issuing a credit note means you reclaim it in the next return.

Example: you charged a customer £1,000 plus £200 VAT in January. In February you agree a partial credit of £500 plus £100 VAT. Your February VAT return should show Box 1 reduced by £100.

Keep all credit notes for at least six years — the same retention period as invoices — since HMRC can audit them during an enquiry.

Credit note template layout

Here is a basic layout you can adapt:

CREDIT NOTE

Your Business Name
Your Address
Your Phone / Email
VAT Number: GB123456789 (if registered)

Credit Note Number: CN-2026-001
Date: 12 March 2026
Original Invoice Reference: INV-2026-018

To:
Customer Name
Customer Address

Description: Partial credit — damaged materials returned
Net Amount:    £150.00
VAT (20%):     £30.00
Total Credit:  £180.00

Reason: Customer returned damaged tiles, partial refund agreed.

You can create this in Word, Google Docs, or use invoicing software with a built-in credit note feature. Our free invoice generator can help you get the format right from the start.

Credit notes vs refunds

A credit note is a document. A refund is money leaving your account. They are related but not the same thing. You might issue a credit note without immediately transferring money — for example, if the customer wants the credit applied against a future invoice. Or you might refund the money first and issue the credit note as the paper record afterwards. Either way, you need the credit note in your records.

Credit notes and Making Tax Digital

From April 2026, self-employed people earning over £50,000 must keep digital records under Making Tax Digital for Income Tax. This includes credit notes. If you are already on MTD for VAT, you will be familiar with the principle: all records must be kept digitally. Credit notes raised in your invoicing software automatically satisfy this requirement.

Using software like InvoiceAdept means your credit notes are stored digitally, linked to the original invoice, and included in any exports for your accountant or MTD submissions.

Common mistakes to avoid

Editing the original invoice. Never go back and change an invoice you have already sent. Once it is in the customer's hands, it is a record. Issue a credit note instead.

Forgetting to reference the original invoice. If your credit note does not clearly state which invoice it relates to, reconciling the accounts becomes a headache for both sides. Always include the original invoice number.

Missing the VAT split. If you are VAT-registered, the credit note must show net and VAT amounts separately. A lump-sum credit without a VAT breakdown does not meet HMRC requirements.

Not keeping copies. Retain credit notes for six years, just as you do with invoices. Digital copies in your accounting software count perfectly.

Useful tools

If you are managing invoices manually and finding credit notes fiddly, consider switching to software that handles them automatically. See also our guide on what to include on a UK invoice legally and our VAT calculator for working out the figures before you issue a credit note.