Handling refunds and credit notes
When you need to reverse an invoice or issue a refund, use a credit note in Xero. Never delete an approved invoice.
Creating a credit note for a full refund
Open the original invoice in Xero and click Credit Note. Xero creates a credit note for the full amount. Approve it. When you process the bank refund to the customer, match the bank payment to the credit note during reconciliation. This correctly reverses the income and the VAT on the original invoice.
Partial credit notes
If only part of the invoice is being refunded (for example, a discount agreed after the original invoice was sent), reduce the credit note amount to the refunded portion. The balance remains as receivable income. For VAT purposes, the credit note reduces Box 1 by the VAT on the refunded amount.
💡 Important: A credit note is also used to correct an invoicing error (wrong amount, wrong VAT rate, wrong customer). Raise the credit note to cancel the incorrect invoice and raise a new invoice with the correct details. This creates a clean audit trail.
Not found what you're looking for?
Please get in touch and we'll be happy to help:
Email: You can submit a request using our contact form
Phone: 020 3897 2233
Live Chat: Select the live chat icon on the bottom right