How do credit notes work in recruitment agency invoicing?
A credit note is a separate document that reduces or cancels an invoice you have already issued. Use one, rather than editing the invoice, once the original has reached the client or your VAT records. It has its own number, names the original invoice and credits VAT at the original rate. On a contract desk it handles disputed hours and goodwill discounts. On a perm desk it pays a rebate when a placement fails. The harder question is the contractor's pay: a credit for hours not worked reverses it, a commercial credit should not.
Written by the Vayora team. Updated 28 October 2026.
Most credit notes on a recruitment desk come from three places. A client disputes hours on a timesheet. A client is given a discount to keep the relationship sweet. Or a permanent placement leaves inside the rebate period and the terms of business say part of the fee comes back. Each is a reduction in what the client owes, and each should leave a clean paper trail rather than an edited invoice.
The mechanics are simple. The credit note is a new document, numbered in its own right, that points at the original. The original invoice stays exactly as it was issued. The client's accounts payable team sees two documents that net to the right figure, and your VAT records show the correction in the period it happened.
Contract desks have a second problem that perm desks do not. The client was invoiced for a day of the contractor's time, and the contractor was paid for it. If the client gets a credit, does the contractor give the money back? The answer depends on why the credit was given, and it is where agencies most often get into trouble.
This page covers the client side, the VAT side and the contractor side in turn. It is not tax or legal advice. Vayora is software, and your accountant signs off the tax treatment of anything described here.
When is a credit note right, and when should you amend the invoice?
The working rule on a desk is simple. If the invoice has not left the building, fix it. If it has gone to the client or into your VAT records, issue a credit note and, where the original was wrong, a fresh invoice. That is desk practice, not an HMRC rule, but it keeps the history intact for both sides.
Editing a sent invoice causes real problems. The client's system has already matched the original to a purchase order. A changed figure under the same number looks like a duplicate or a fraud flag. Your own accounts system and your VAT return may already hold the old number. A credit note leaves all of that alone.
Credit what is wrong and nothing more. A full credit cancels the invoice; a partial credit takes off a day or a rate difference and leaves the rest standing, and several partial credits can stack against one invoice as long as together they do not exceed it. A void is a different tool again. It is for an invoice that should never have existed, such as a duplicate raised in error, and it belongs before the client has acted on it. If the client has paid or the invoice has been used, credit it instead. The credit note glossary entry sets the two side by side.
How does VAT work on a credit note?
HMRC's VAT guide (Notice 700, paragraph 18.2) deals with credits. Where both sides agree, and the customer can reclaim all the VAT as input tax, the original VAT charge need not be adjusted. Otherwise, both sides should adjust it and the supplier should issue a credit note and keep a copy. Most clients of a recruitment agency are VAT registered, but whether to adjust is a call for your accountant, not the desk.
To be valid for VAT, paragraph 18.2.3 says a credit note must reflect a genuine mistake, an overcharge or an agreed reduction in the value of the supply. It must give the customer a real entitlement to a refund or an offset against future supplies. It must also meet a 14-day timing condition, so do not let credits sit in a draft folder. Read the paragraph for how the 14 days run in your case.
The note must carry the details the paragraph lists: its own number and date, your name, address and VAT number, the customer's details, a description, the amounts, and the VAT credited in sterling. It must show the number and date of the original VAT invoice. The rate used is the one in force at the tax point of the original supply (paragraph 18.2.5). A credit with no VAT adjustment should say "This is not a credit note for VAT".
A worked example. A contractor is invoiced at a £550 charge rate for 5 days: £2,750 plus £550 VAT, £3,300 in total. One day turns out not to have been worked. The credit note is £550 plus £110 VAT, £660, and it names the original invoice. The client now owes £2,640 on that invoice.
What documents and effects follow from each situation?
The table sets out the usual situations on a contract and perm desk. The contractor pay column is the part that needs a decision, not a default.
| Situation | Document | VAT effect | Contractor pay effect |
|---|---|---|---|
| Invoice not yet sent, wrong rate | Correct the draft | None, nothing issued | Correct the pay side to match |
| Day on invoice was never worked | Partial credit note, then re-issue if needed | Output VAT reduced by 20 per cent of the credit | Reverse the pay for that day (£450 in our example) |
| Goodwill discount on hours that were worked | Partial credit note | Output VAT reduced by 20 per cent of the credit | None by default, the margin absorbs it |
| Disputed quality of work already done | Credit note only if agreed with the client | Reduced by 20 per cent of the agreed credit | Take advice before deducting anything |
| Perm candidate leaves inside the rebate period | Credit note for the rebate share of the fee | Reduced by 20 per cent of the credit | None, no contractor involved |
| Duplicate invoice, client not acted on it | Void the invoice | Not counted as a supply | Cancel any pay raised against it |
| Client simply has not paid | No credit note | Bad debt relief, ask your accountant | Contractor still paid for work done |
How do rebates and disputed hours work?
On the perm side, a rebate is the share of a placement fee you give back when a candidate leaves inside the period your terms set. A £6,000 fee plus £1,200 VAT is £7,200. If the terms give back half the fee, the credit note is £3,000 plus £600 VAT, £3,600. The rebate period page covers how those periods are written. Treat the VAT on a rebate as an agreed reduction in the value of the supply and confirm it with your accountant.
The failure on perm desks is commission. Your consultant was paid on £6,000, and the fee is now £3,000. If the credit note is raised in one system and the commission is calculated in another, nobody adjusts the commission and you pay it twice.
On the contract side, hours disputes come from the timesheet. If the approved timesheet was wrong, the cleanest path is to fix the cause: see the timesheet to invoice walkthrough. If the hours were right and the client simply wants a reduction, that is a commercial credit, which is covered in the next section.
Should a credit to the client ever reduce the contractor's pay?
Only when the credit corrects work that was not done. If the contractor did not work the day, the agency never owed the pay for it, and it should be reversed. The £450 day is netted off the next pay run, with the contractor told in plain words why.
A commercial credit is different. The contractor worked the day. The client has asked for money back, or the agency has offered it to keep the account, or there is a quality dispute. The contractor's company has a contract that says it is paid for approved time. Taking that money back because the client will not pay in full is withholding pay.
The Conduct of Employment Agencies and Employment Businesses Regulations 2003 address this in regulation 12. An employment business must not withhold, or threaten to withhold, a work-seeker's pay for work done, with narrow exceptions. The exceptions cover a work-seeker who cannot produce hirer-authenticated evidence of work done, a work-seeker who did not work in the period, and matters within the employment business's control. A hirer that has not paid is not one of them.
A contractor who has opted out of the regulations under regulation 32(9) is in a different position. The opt-out turns off the extensions that make the regulations protect a contractor's company, and the text does not name regulation 12 among them. What that means for a given contract is a legal question, so take advice. The Conduct Regulations opt-out entry explains how an opt-out works in practice, and the contract itself may protect the contractor anyway.
The default we would use: reverse the pay when the work was not done, and absorb a commercial credit in margin. If you want to claw a commercial credit back from the contractor, that needs their agreement, in writing, before you do it.
What does the client's accounts payable team expect?
Accounts payable teams want to match, not read. A credit note that is easy to match names the original invoice number and carries the same purchase order reference. A note that says "discount" and nothing else sits in a queue while someone works out which invoice it belongs to.
The reason should be one line a clerk can understand: "Day of 14 October not worked, timesheet corrected". Send it to the same billing contact as the original, not to the hiring manager, and say whether you expect a refund or an offset against the next invoice. HMRC's rule requires the customer to have a genuine entitlement to one or the other.
What should the audit trail show?
For each credit you should be able to answer five questions in under a minute. Which invoice did it credit? Who raised it, and when? What was the reason? What happened to the contractor's pay? What happened to the commission or gross profit figures?
That means the credit note is linked to the original in your records, the reason is stored on the document, and the pay and commission effects are visible rather than inferred. If any of those live in someone's head or an email, a dispute six months later becomes expensive.
- The credit note number and the original invoice number it names.
- The amount, the VAT credited and the rate used.
- The reason, in the client's words and yours.
- Whether the credited work was done, and what that decided for the contractor.
- The effect on the placement's gross profit and on the consultant's commission.
- Whether it has reached your accounts system.
Where Vayora fits
Vayora issues a full or partial credit note against a client invoice. The note is numbered with CN- followed by the original number, the PDF is titled Credit Note, and it carries the line "Credit against invoice" with the original number. Your reason is printed on it. VAT is credited at the original invoice's rate, and the amount cannot exceed what remains creditable on that invoice after earlier credits. Credit notes cannot be raised against a credit note or a voided invoice, a paid invoice cannot be voided, and cannot be unmarked as paid while a credit note stands against it.
When the invoice includes contractor pay, Vayora asks one question before it issues the note: was the credited work done? If it was not, the contractor's pay for it is reversed in proportion to the share credited and netted off the next pay run. If it was, the contractor is paid in full and the credit comes out of your margin. The question is asked because regulation 12 says pay for work done should not be withheld, not assumed. The credit also unwinds the placement's gross profit, and the consultant's commission in the month it is raised is reduced to match, as the recruiter commission entry describes.
Where it stops. The credit note does not carry the client's purchase order reference, so check that your client's system can match it. Credit notes are not pushed to Xero yet, so you raise them there by hand. A Vayora credit note does not decide whether your VAT position needs an adjustment, and it does not file anything with HMRC. Those stay with your accountant. If you want to see how this sits alongside timesheets and pay runs, start a free trial and raise one against a test invoice, or read about contract finance.
Common questions
- Can I delete an invoice instead of issuing a credit note?
- Only before it has gone anywhere. Once an invoice has been sent to the client or entered in your VAT records, delete nothing. Issue a credit note that names the original. If the invoice should never have existed, such as a duplicate the client has not acted on, void it instead, and keep the reason.
- Does a credit note need to show VAT?
- Where the VAT on the original is being adjusted, yes. HMRC's VAT Notice 700 expects the credit note to show the VAT credited in sterling, the original invoice number and date, and the rate that applied at the original tax point. A credit with no VAT adjustment should say it is not a credit note for VAT.
- If a client gets a goodwill credit, do I take it from the contractor?
- Not by default. If the contractor worked the days, they have earned the pay, and the Conduct Regulations stop an employment business withholding pay for work done because a hirer has not paid in full. Absorb a goodwill credit in margin unless the contractor agrees otherwise in writing. Check your terms and take advice.
- How do I credit a perm rebate?
- Raise a credit note against the placement fee invoice for the share your terms of business give back, with VAT credited at the original rate. Reference the original invoice number. Then adjust the consultant's commission to match, because a rebate that reaches the client but not the commission run costs you twice.
- Can I raise more than one credit note against an invoice?
- Yes, and partial credits often stack. Each should name the original invoice and carry its own number, and together they should not exceed the original total. After several, consider cancelling the invoice and raising a corrected one, which is easier for the client to match.