What Is a Proforma Invoice?
Proforma Invoice

The word "proforma" means "as a matter of form". A proforma invoice looks like an invoice in form, with a description of goods or services, prices, perhaps VAT, and a total, but it does not do an invoice's legal job. It is sent before the sale is completed, to show the customer what they will pay and, very often, to ask them to pay it in advance.

How a proforma invoice works

A business issues a proforma when it wants the customer to see, approve or pay a bill before anything is supplied. The customer can use it to arrange payment, raise an internal approval, or satisfy a customs or finance requirement. If the customer goes ahead, the business supplies the goods or services and issues the real invoice. If not, the proforma simply lapses. Because nothing has been supplied, a lapsed proforma leaves no income to reverse and no VAT to adjust.

VAT Notice 700 describes the typical use: proformas are often used to offer goods or services to potential customers, the offer may or may not be taken up, and the goods or services will not be supplied unless payment is received.

Proforma invoice compared with related documents

What a proforma invoice contains

There is no legal list of contents for a proforma, but a useful one closely mirrors the invoice that will follow, so the two can be matched:

• the heading "Proforma invoice" and the words "This is not a VAT invoice"
• a reference number from its own proforma series, such as PRO-0001
• the seller's and the buyer's names and addresses
• a description of the goods or services, with quantities and prices
• VAT shown for information, if the seller is VAT registered
• the total and how to pay
• how long the prices or offer stand

When the real invoice follows

HMRC is explicit: if, after issuing a proforma, you actually supply the goods or services or receive payment, you must issue a proper VAT invoice. For a business that is not VAT registered, the ordinary invoice follows at the same point. That invoice takes the next number in the invoice sequence, refers to the proforma, and is what goes into income records and, for VAT-registered businesses, the VAT return.

Why businesses use proformas

Payment before supply. For new customers, bespoke work or goods shipped abroad, sellers often want payment first. A proforma gives the buyer a formal document to pay against.

Budget approval. A buyer's finance team may need a document showing the exact cost before it will release funds.

Customs and trade finance. In international trade, a proforma can support an import licence, a letter of credit or a customs broker's preparations, ahead of the final commercial invoice.

Price confirmation. For a large order, a proforma confirms prices and quantities before either side commits.

A worked example

A UK printer, VAT registered, is asked by a new charity customer for 5,000 leaflets at £600 plus VAT. The printer sends PRO-0114: 5,000 leaflets, £600 net, £120 VAT, £720 total, "This is not a VAT invoice", payment required before printing, valid for 14 days. The charity pays £720. The printer prints the job and issues VAT invoice INV-0762 marked paid, referring to PRO-0114. The charity files INV-0762, not the proforma. The printer's income and output VAT come from INV-0762.

Common mistakes with proformas

• Counting proformas as sales. They are not income, and counting them overstates turnover.
• Numbering proformas as invoices. A lapsed proforma leaves a gap in the invoice sequence; use a separate series. The invoice number generator can set one up.
• Omitting "this is not a VAT invoice". A buyer may try to reclaim VAT from it, which HMRC will not accept.
• Letting prices stand indefinitely. State how long the offer is valid, so an old proforma cannot be paid at out-of-date prices.
• Never issuing the real invoice. The buyer is left with nothing to reclaim VAT from, and the seller's records show a payment with no sale.

Proformas in international trade

Proformas are especially common when goods cross borders. Before an overseas buyer commits, they may need a document that sets out exactly what is being bought, in what quantity, at what price and in what currency. Their bank may need one to open a letter of credit; their customs broker may use one to prepare an import declaration; their authorities may need one to issue an import licence. The proforma does that job before the goods exist or leave the warehouse.

When the goods ship, the final paperwork takes over: the seller's sales invoice, and a commercial invoice for customs showing the goods' description, value, origin and commodity codes. The details on the proforma should therefore match the final documents closely. A proforma that lists a different value or description from the commercial invoice invites questions at the border. If you invoice in another currency, the guide on invoicing in a foreign currency explains the sterling rules for VAT.

How a buyer should treat a proforma

If you receive a proforma, treat it as a request, not a bill you owe for goods received. Check the contents against what you want to buy, decide whether to pay in advance, and if you do, pay against the proforma's reference. Then make sure you receive the real invoice. If you are VAT registered, that invoice, not the proforma, is what you need to reclaim the VAT. Record the advance payment in your records as a prepayment until the invoice arrives, so your costs are recorded in the right period.

Proformas and cash flow for small businesses

For a small business, the main value of a proforma is getting paid before committing money. Bespoke work, large material orders and first jobs for unknown customers all carry risk if you supply first on 30-day terms. Asking for payment against a proforma is a normal request that most customers accept, and it shifts the risk away from you. Once a customer has a record of paying on time, you can move them to ordinary invoices and payment terms. The guide on invoice payment terms covers that step.

A short history of the term

"Pro forma" is Latin for "as a matter of form" or "for the sake of form". In business it has long described a document prepared in advance to show what a final document will look like, which is exactly what a proforma invoice is: the invoice as it will be, sent before it can properly be issued.

Proformas for businesses that are not VAT registered

The VAT points fall away, but the principle is the same. A proforma is a request, not a sale. It carries no VAT, stays out of income, and is followed by an ordinary invoice once the work is done or the money arrives.

Keeping proformas in your records

Although a proforma is not income, keep it. It shows what was offered and on what terms, it links the advance payment to the eventual invoice, and it helps settle any disagreement about what the customer agreed to buy. File it with the invoice that followed, or, if it lapsed, with a note saying so. The same retention periods as your other records are a sensible guide: see how long to keep invoices.

Related terms

A proforma sits between a quotation, which offers a price, and an invoice, which demands payment. For the practical differences and a longer worked example, see proforma vs invoice. For payment in stages across a longer job, see stage payment; for the final customs paperwork on exports, see commercial invoice. The invoice due date calculator sets the date by which advance payment is needed, and the VAT calculator shows the VAT to display for information.

Proforma or deposit invoice?

Where a customer pays part of the price up front for a confirmed job, many businesses issue a deposit invoice instead: a real invoice for the deposit, with the balance invoiced later. For a VAT-registered business, receiving an advance payment generally creates a tax point for that amount, so a VAT invoice for the deposit is usually the tidier route. A proforma suits the case where nothing is confirmed until payment arrives.

In short, and whatever your business sells: a proforma shows the bill before the sale, the invoice records the sale, and only the invoice counts for your income and for VAT.