Credit note vs debit note: what is the difference?

The short version

Once an invoice has been sent, you should not edit it or delete it. Your customer may already have booked it, and if you are VAT-registered it is part of your tax record. You correct it with a second document that points back to it.

If you want the background on credit notes alone, see what a credit note is.

When to issue a credit note

Issue a credit note whenever the value of a supply you have already invoiced goes down. Common cases:

• Goods returned. The customer sends back 3 of 20 chairs.
• Pricing mistake in the customer’s favour. You billed £95 an hour instead of the agreed £85.
• Cancelled or reduced work. A two-day workshop became one day.
• A discount or rebate agreed after the invoice. For example a volume rebate earned at the end of the quarter.
• A wrong invoice altogether. Wrong customer, wrong VAT rate, wrong amount. Here you credit the whole invoice and issue a fresh, correct one.

HMRC is clear that a credit note must reflect a genuine mistake, overcharge or agreed reduction in the value of the supply. It is not a way to move income between VAT periods.

When to issue a debit note

A debit note goes the other way. Use one when the customer owes more than the original invoice said:

• you delivered 120 units but invoiced 100;
• a price increase agreed in the contract applies from a date you missed;
• freight, packing or insurance costs arrived after you invoiced and the contract lets you pass them on.

Many small businesses simply raise a new invoice for the difference instead, and that is acceptable in the UK and most EU countries as long as it meets the normal invoice rules and refers to the original. A debit note is mainly a matter of clarity: it shows the customer’s accounts team that the extra charge belongs to an invoice they already have.

One trap: in some industries the buyer sends a “debit note” to the seller to claim money back, for example for damaged goods. If you receive one, treat it as a request. You still issue your own credit note if you agree.

What to put on a credit note or debit note

Both documents follow the same pattern as an invoice. Include:

1. A clear title: “Credit note” or “Debit note”.
2. A unique number. Many businesses use a separate series such as CN-2026-004 or DN-2026-002.
3. The date of issue.
4. Your name, address and VAT number, and the customer’s name and address.
5. The number and date of the original invoice.
6. A description of what is being credited or charged, and why.
7. Quantities and amounts, the VAT rate, and the VAT amount being credited or charged.
8. The new total and, for a credit note, whether you will refund the money or offset it against the next invoice.

Ready-made layouts are on the credit note template and debit note template pages.

UK VAT rules on credit notes

HMRC’s VAT guide (Notice 700, paragraph 18.2) sets out what a valid credit note needs if you want to reduce the VAT you accounted for. Among other things it must show the identifying number and date of the credit note, the supplier and customer details, a description of the goods or services, the amount credited for each item and the VAT rate and VAT amount credited.

It must also show the number and date of the original VAT invoice or invoices. If you genuinely cannot do this, HMRC says you must be able to satisfy it by other means that you accounted for VAT on the original supply. In practice, always include the reference: it is the easiest proof.

The guide also says the credit note should be issued within 14 days of the refund or adjustment being agreed. The customer then reduces the input VAT they reclaimed, and you reduce your output VAT, normally in the VAT return for the period in which the credit note is issued.

EU VAT rules on credit notes

Inside the EU the VAT Directive treats a document that amends an earlier invoice and refers to it specifically and unambiguously as if it were an invoice. In plain terms, a credit note or debit note must point clearly at the invoice it changes, and it should carry the details an invoice would.

Each country adds its own layer. A few examples you will meet:

• Germany: a seller’s correcting document is often called Rechnungskorrektur or Stornorechnung. Be careful with the word Gutschrift, which in German VAT language can also mean self-billing by the buyer.
• Spain: corrections are made with a factura rectificativa, which must say it is corrective and name the invoice it corrects.
• Italy: credit notes are note di credito and, like invoices, generally go through the SdI e-invoicing system.

Where e-invoicing is mandatory, the credit note usually has to be an e-invoice too. Check your country page before you send a PDF.

A worked example

Invoice INV-2026-118, dated 2 October 2026: 20 office chairs at £150 each, £3,000 plus 20% VAT of £600, total £3,600. The customer returns 3 damaged chairs on 20 October.

• Credit note CN-2026-007, dated 21 October 2026, “relates to invoice INV-2026-118 of 2 October 2026”.
• 3 chairs at £150 = £450 credited.
• VAT at 20% credited: £90.
• Total credited: £540. New amount owed on the order: £3,060.

If instead the customer had kept 3 extra chairs you forgot to bill, you would issue debit note DN-2026-002 for the same £450 + £90 = £540, again quoting INV-2026-118.

How the customer books it

It helps to know what happens on the other side. When your VAT-registered customer receives a credit note, their accounts team matches it to the original invoice by the number you quoted, reduces the amount payable in their ledger and reduces the input VAT they reclaim. If the original invoice has already been paid, they will either ask for a refund or deduct the credit from your next invoice.

That is why vague credit notes cause problems. A document that says “credit for issues last month” with no invoice number forces someone to phone you, and it may sit unprocessed until they do. A debit note without a reference is worse: it can look like a duplicate invoice and get rejected.

Three habits keep things smooth:

• quote the original invoice number in the email subject as well as on the document;
• say whether you will refund the money or expect it to be deducted from the next payment;
• send the credit note to the same address you sent the invoice to, usually the accounts payable inbox.

If the original invoice is still unpaid, the simplest instruction is: “Please pay INV-2026-118 less CN-2026-007, a total of £3,060.”

Making one without accounting software

You can produce either document in Invoiceferry by changing the document title to “Credit note” or “Debit note”, giving it its own number and writing the original invoice number and date in the notes. The editor does not accept negative amounts, so write the credited lines as positive values under a clear “Credit note” title, or, for a fully wrong invoice, cancel it in full and issue a replacement invoice. Keep both documents together in your records.

Correcting an export invoice? The same principles apply to a commercial invoice, but tell your freight forwarder too, because customs may already hold the first version.

Related tools and articles

• What is a credit note?A credit note reduces or cancels an invoice you have already issued. See when to use one, what to include, a worked example and country notes.
• Credit noteSent the wrong price, got goods back or agreed a discount after invoicing? Do not edit the old invoice.
• Debit noteUndercharged a customer or incurred a cost after invoicing? A debit note adds the extra amount and links it to the original invoice.