Last updated: 14 October 2026
Do you have to include VAT on a credit note issued to a customer?
Yes, if the original invoice included VAT. When you issue a credit note to reduce or cancel a VAT invoice, the credit note should show the VAT being credited at the same rate as the original invoice. You then reduce your output VAT on the VAT return for the period in which you issue the credit note. Your VAT-registered customer reduces their input VAT in the same way.
What a VAT credit note must show
- The words “credit note”
- A unique number and the date of issue
- Your name, address and VAT number
- The customer’s name and address
- The number and date of the original invoice
- The reason for the credit, for example returned goods or a discount
- The net amount credited, the VAT rate and the VAT amount
- The total amount credited
Example
You invoiced £1,000 plus £200 VAT. The customer returns goods worth £250. You issue a credit note for £250 plus £50 VAT, totalling £300. On your VAT return, output VAT falls by £50 and sales in box 6 fall by £250.
Credit notes without VAT
You can choose to issue a credit note without VAT, as long as it is clearly stated and you make no VAT adjustment. You then can’t reduce your output VAT, and the customer keeps their input VAT claim. It is simpler for small discounts, but rarely used.
When a credit note is needed
- Returned or faulty goods
- Price reductions or a volume rebate after the invoice
- A cancelled order that was already invoiced
- An invoicing error
Credit notes vs bad debt relief
If a customer simply doesn’t pay, don’t issue a credit note. Use bad debt relief instead, once the debt is more than 6 months overdue and written off.
Time limits
Make VAT adjustments for credit notes in the period you issue them. If an error affects an earlier return, normal error correction rules apply.
In your software
In Xero or QuickBooks, create the credit note against the original invoice, so the VAT reverses automatically. Then allocate it to the invoice or refund the customer.
Credit note mistakes
A credit note must show the original invoice number, the VAT being reversed and the reason. Simply editing an old invoice, or showing a refund without VAT, can leave you paying too much VAT. Record credit notes in the period they’re issued, not the period of the original sale.
A further example
A wholesaler invoices £1,200 including £200 VAT, then gives a £300 credit. The credit note shows £250 net and £50 VAT, and the £50 reduces the output VAT for that quarter.
Frequently asked questions
Can I issue a credit note months later?
Yes, if there is a genuine reason. The VAT adjustment goes in the current period.
Do I need a credit note for an early-payment discount?
Not if your invoice shows the terms of the discount. Account for VAT on the amount actually paid.
What if the VAT rate has changed?
Use the rate from the original invoice.
Do I need to send it to the customer?
Yes, so they can adjust their VAT.
Related: customer refusing to pay VAT and how to calculate VAT.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with VAT on credit notes. See our VAT accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 14 October 2026. It is not personal advice, so speak to an accountant about your own situation.
