What is the difference between a proforma and an invoice?

An increasing number of businesses are using proforma invoices to obtain payment from their customers in advance of supplying goods. 

Why do they do this and what is the difference between a proforma and an invoice?

Why?

Businesses don't want to commit to either manufacturing or purchasing products they are selling on to the customer without a financial commitment. They themselves may be asked for a deposit or full payment up front so they in turn ask for a payment in advance.  If goods being supplied are expensive this makes sense but many businesses have begun asking for an advance payment for just small amounts.  

What is the difference?

A proforma is a request for payment, often to a new customer,  and generally for goods which will be provided once payment has been received.  In effect it is a request for a payment in advance.  The proforma is not an invoice and cannot be used for accounting purposes, either by the customer or the supplier, but is a commercial document setting out the goods or service to be provided and the cost of them.  It is usually set out in exactly the same way as a VAT invoice but should contain the wording "This is not a VAT invoice".

A VAT invoice must contain specific information and is provided by a VAT registered business to their customer so that they can reclaim the VAT they have been charged if they are also a VAT registered business.

What about VAT?

Businesses who use proformas as a request for payment should immediately supply a VAT invoice to their customer, however many businesses do not voluntarily supply this meaning the customer is unable to reclaim the VAT element of the payment.  

Where a payment has been made in advance of the goods or service being supplied, both the customer and the supplier need to understand when the tax point occurs.  The tax point indicates which VAT return the transaction should be included on and HMRC are very clear about when the tax point occurs:

• If a payment is made in advance of the supply the tax point to be shown on the invoice is the date the payment is received.  In this instance you may have two dates on the invoice - a tax point date as well as an invoice date
• If a VAT invoice is issued more than 15 days after the date of supply the tax point is the date of supply and not the date of the invoice.

If a business uses the VAT Cash Accounting Scheme the tax point will be the date the payment is made or received.

VAT invoices must be issued within 30 days of the date of supply or the date the payment is received and businesses have a responsibility to supply their customers with a VAT invoice for sales of £250 or more.  They can supply a simplified invoice for sales of less than £250.

If you pay a deposit towards a purchase this will create two tax points and an invoice should be issued for the deposit and another issued for the balance.

Summary

If it is your policy to provide your customer with a proforma ensure you send a VAT invoice so that your customer can reclaim the VAT you have charged them.  The VAT on the payment you receive will be due at the tax point, as set out above, and therefore your customer must be able to reclaim the VAT under the same terms.

Sending a proforma and following that up with a VAT invoice creates double the administration and seems pointless where only small amounts are involved.