Returned goods, credit notes, debit notes and VAT

This guide explains the details of what you need to do when you issue or receive a credit note or a debit note.

If you return goods to a supplier for a full or partial credit, or if a customer returns goods to you for a full or partial credit, you must adjust the VAT on the transaction by replacing the invoice, or issuing a credit or debit note as appropriate.

If you replace returned goods with goods of lesser or greater value, you must adjust the VAT on the transaction by issuing a credit note or supplementary invoice. If you replace returned goods with goods of the same value, you do not need to issue another VAT invoice.

If you obtain a credit note or issue a debit note, you must record this in your records. On your next VAT return, you must deduct the VAT on the credit or debit note from the amount of VAT you reclaim or pay as appropriate.

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For a buyer who has received a VAT invoice

If you have returned goods to the seller for a full or partial credit you have three options:

  • you can return the invoice to your supplier and obtain a replacement invoice showing the proper amount of VAT due, if any
  • you can obtain a credit note or supplementary VAT invoice from your supplier
  • you can issue a debit note to your supplier

If you issue a debit note or receive a credit note, you must:

  • record this in your accounting records
  • on your next VAT return, deduct the VAT on the credit or debit note from the amount of VAT you can reclaim

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For a seller who has issued a VAT invoice

If you receive returned goods from a customer, you have three options:

  • you can cancel and recover the original invoice, and issue a replacement showing the correct amount of any VAT due, if any
  • you can issue a credit note or supplementary VAT invoice to your customer
  • you can obtain a debit note from your customer

If you issue a credit note or receive a debit note, you must:

  • record this in your accounting records
  • on your next VAT return, deduct the VAT on the credit or debit note from the amount of your VAT payable

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Partial or full replacement of returned goods by the seller

If you exchange returned goods for replacement goods that are worth less than the original goods, you must issue a credit note to your customer for the difference in value.

If you exchange returned goods for replacement goods that are worth more than the original goods, you must account for the additional VAT by issuing an additional VAT invoice.

If you exchange returned goods for replacement goods that are worth the same as the returned goods, you can either let the original VAT charge stand, or you can cancel the original invoice by issuing a credit note and charge VAT on the replacement goods.

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What credit and debit notes must show

All credit notes and debit notes issued must have a reference to the number and date of the original invoice. They must also clearly show both the correct and incorrect amounts of VAT.

To be valid for VAT purposes a credit or debit note must:

  • be headed 'credit note' or 'debit note' as appropriate
  • reflect an agreed reduction in the value of the sale and be issued within one month of this agreement
  • represent a genuine entitlement or claim for the amount either to be refunded or offset against the value of future sales

A valid credit or debit note must also show:

  • an identifying number and the date of issue
  • the name, address and VAT registration number of the supplier
  • the name and address of the customer
  • the reason for its issue
  • a description of the goods or services
  • the total amount credited, excluding VAT
  • the rate and amount of VAT credited
  • the number and date of the original VAT invoice

More details about keeping records and accounting for credit or debit notes

Get information about keeping records, invoicing and accounting for VAT

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Adjustment on VAT returns

If your VAT return needs to be adjusted for credit or debit notes that apply to a transaction that occurred in a previous VAT accounting period, HM Revenue & Customs (HMRC) considers this to be a normal VAT accounting adjustment, not an error.

Get information about how to correct errors, put things right and adjust payments or claims

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More useful links

Find out about VAT registration

Read about how VAT is treated in cash-in-hand transactions

Read about the different VAT rates

Get information about products and services where VAT is charged

Read our guide to retail VAT schemes

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