A credit note contains the same information as a sales invoice; instead of requesting payment, it authorises the receiver to claim back the specified sum.
Have you been tasked with issuing a credit note to a customer? Read on for a free credit note template that you can use to create a credit note in a few minutes.
Table of Contents
When Do I Need to Issue Credit Notes?
Credit notes are used to rectify mistakes or credit amounts raised in your sales invoice. It may be used to credit all or part of an invoice, depending on the circumstances, and serve as an accounting record for both parties to counter the invoicing error.
There are a number of different circumstances when a credit note can be issued:
- If an invoice has been raised in error
- If you have overcharged a client
- If your client has an issue and you agree to a full or partial refund
- If the wrong goods have been shipped or an order has been processed in error
- To write off a short payment by a customer, for example, when you choose to write off small underpayments from a good client
Who Issues the Credit Note?
A credit note is issued by the seller to the purchaser. The credit note is always issued by the sender of the invoice, not the recipient.
As a business, you would receive a credit note from a supplier if there had been an error with an invoice you had received. On the flipside, you would issue a credit note to a customer if there was a mistake with your invoice.
How Is a Credit Note Fulfilled?
If the credit note relates to an invoice that is yet to be paid, then the balance is reduced by the amount of the note.
If the balance has already been paid, the recipient of the credit note can ask for a cash refund, or the value of the credit can be offset against future purchases.
No Cost. No Obligation.
100% Confidential.
How to Create a Credit Note
Most accounting software packages will include an option for generating a credit note, but it’s easy to make your own using Word, Excel, Google Docs, or Excel. If you choose to make one yourself, you can print the credit note or save it as a PDF, then send it to your client.
Here’s the essential information to include on a credit note:
- Your accounting details: This is the information both you and your customer will need for administration and recording purposes, such as:
- Date of issue
- Credit note number
- Customer reference number
- Payment terms.
- Relevant contact details
Remember to make it as clear as possible that this is a credit note, not an invoice.
- The credit details. Reference the invoice number the credit relates to, and then outline information such as the original amount paid, the amount that should have been paid, and the subsequent credit owed. It can also help to include a brief description of why the discrepancy arose.
- Fulfilment. Explain how the customer can redeem the credit, including clear details about how they can use it to make future purchases, such as what information they will need to reference.
To help you get started, here’s a basic credit note template:
[YOUR COMPANY NAME]
[Your Address]
[Contact Details]
[VAT Registration Number if applicable]
CREDIT NOTE
Credit Note Number: CN-[Number]
Date: [Date of Issue]
Customer Reference: [Customer Account Number]
Original Invoice Number: INV-[Number]
Original Invoice Date: [Date]
Bill To:
[Customer Name]
[Customer Address]
Reason for Credit: [Brief explanation of why credit is being issued]
| Description | Quantity | Unit Price | Total |
|---|---|---|---|
| [Item/Service] | [Qty] | £[Price] | £[Amount] |
Subtotal: £[Amount]
VAT (20%): £[Amount]
Total Credit: £[Total Amount]
Terms: This credit can be applied to your account balance or offset against future invoices. For refund requests, please contact us within 30 days.
Important Considerations for UK Businesses
VAT Implications
If you’re VAT-registered, you’ll need to account for VAT on your credit notes. The credit note should show the VAT separately, just as your original invoice did. This adjustment will affect your VAT return for the period in which the credit note is issued.
Keep accurate records of all credit notes for your VAT submissions and ensure they’re properly documented in your accounting system.
Record Keeping
Credit notes are legal documents and must be retained for the same period as invoices. That means you should retain credit notes for at least six years for tax purposes in the UK. Maintain a clear filing system that links credit notes to their corresponding invoices.
No Cost. No Obligation.
100% Confidential.
International Clients
When issuing credit notes to overseas clients, consider currency implications. If the original invoice was in a foreign currency and exchange rates have shifted, clarify whether the credit will be issued at the original exchange rate or the current rate.
For cross-border transactions, be aware that different countries may have specific requirements for credit note formatting and content.
Read more in our guide to working with international clients.
When Credit Notes Aren’t Enough
While credit notes are useful for correcting genuine errors and maintaining good customer relationships, they shouldn’t become a regular tool for managing payment disputes or covering up recurring invoicing problems.
If you find yourself issuing credit notes frequently due to disputed invoices or client dissatisfaction, it may indicate more in-depth issues with your invoicing process, product quality, or client relationships.
- Clear communication and accurate invoicing from the outset prevent many situations that require credit notes
- Ensure your terms and conditions are transparent, your quotes are detailed, and any variations to agreed work are documented and approved before proceeding
Sometimes disputes arise not from genuine errors but from clients seeking to delay or avoid payment. If you’re regularly dealing with clients who dispute invoices without valid reason or who use minor discrepancies as leverage to pay invoices late or withhold payment entirely, read our guide to dealing with clients that always pay late.
Safe Collections can help you to distinguish between legitimate disputes requiring credit notes and bad faith attempts to avoid payment. We can also advise on proper documentation practices that protect you from unfounded disputes in the first place.
If you need help, contact us for a free review of your situation.
