UK VAT credit notes: reduce the price without losing the invoice trail
A UK VAT-registered supplier invoices £1,000 plus £200 VAT for a completed job, and the customer pays in full. In a later VAT period, both sides genuinely agree to take £100 off the price. Editing or deleting the original invoice would make the account look tidy and remove a record HMRC expects you to keep. In this hypothetical case, the original invoice stays as issued. A credit note records the reduction and refers back to it, and the VAT adjustment goes into the period in which the price actually decreased.
Keep the original invoice
GOV.UK's guidance on VAT records says you must keep sales invoices, including ones that were cancelled or produced by mistake, and keep credit and debit notes. A credit note changes the commercial position. It does not replace the document it adjusts.
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What the credit note must show
Section 18 of VAT Notice 700 explains when a credit note works. It must reflect a genuine overcharge or mistake, or an agreed reduction in price, and the customer must be entitled to the credit. HMRC lists what the note should contain:
- A unique identifying number and the date of issue.
- The supplier's name, address and VAT registration number, and the customer's name and address.
- The number and date of the original invoice.
- A description identifying the goods or services, with the quantity and amount for each description.
- The net amount of the reduction.
- The VAT rate and the amount of VAT credited, in sterling.
Sources and context, checked :
Use the original rate and the right period
The VAT on the credit uses the rate that applied at the original supply's tax point. Notice 700 was last updated on 25 June 2026, but the credit note rules discussed here have applied since 1 September 2019.
HMRC's internal manual on changes in consideration, VATSC06635, describes the timing for a later price reduction. The decrease generally takes place when the supplier makes the refund. Offsetting the amount against something the customer already owes the supplier can also count. The supplier should issue the credit note within 14 days of the decrease and account for the VAT in the period in which the decrease occurs.
So the date printed on the credit note does not on its own decide the VAT period. A promise of credit against future orders is not the same as a refund or an offset against an existing debt, so check what has actually happened before adjusting.
The worked example
The original supply was correctly invoiced at the 20% standard rate in force at its tax point and paid in full. No special VAT scheme applies. Notice 700 allows parties who both have full input tax recovery to agree not to adjust the VAT in some cases; these parties have made no such agreement.
The supplier refunds £120 in the later period, issues the credit note within 14 days of the refund and reduces output tax by £20 on the return for the period of the refund. The original invoice keeps its number and date, and the earlier return stays as filed, because the VAT declared on it was correct at the time.
| Amount | Original invoice | Credit note | Revised position |
|---|---|---|---|
| Net | £1,000 | -£100 | £900 |
| VAT at 20% | £200 | -£20 | £180 |
| Total | £1,200 | -£120 | £1,080 |
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When a credit note is the wrong tool
If the VAT on the original invoice was wrong and has already been declared, Notice 700 points to the normal VAT error-correction route. Issuing a credit note later does not by itself repair that return.
A customer who simply does not pay has not agreed a lower price. HMRC's VAT Output Tax Toolkit, a risk checklist published in June 2020, separates credit notes for genuine corrections or reductions from bad debt relief, which has its own conditions. Crediting away an unpaid invoice sidesteps those conditions. The toolkit illustrates the distinction; the current rules are in Notice 700.
Keep the decision and the entry together
Our recommended workflow ties the commercial agreement to the VAT entry:
- Record the reason for the reduction and the agreement before choosing a credit or reversal function in the software.
- Link the original invoice, the agreement, the credit note, the refund or offset evidence and the VAT period used.
- Keep the original invoice's status and audit trail intact, including any replacement invoice.
- Send unpaid debts and errors on returns already filed to whoever handles VAT, rather than crediting them away.
For the next credit note
Check that the refund or offset date is on file before the credit note goes out. That date, not the one printed on the credit note, generally decides which return carries the adjustment.