Proforma Invoice

[IMHO]

Can someone explain to me what a proforma invoice is and what the purpose of it is.

I am in the accommodation business and issue a proforma invoice to clients to do pre-payment. Then, when I receive the payment, I issue a Tax Invoice. That is my understanding.

I however get clients that refuse to pay on said proforma invoice. Who needs to be educated?

I do not issue Tax Invoice before payment, as I am used to help defraud companies. People book, never stay, or pay, and use the invoice to claim from their company.

It is in the latest case actually the accounts department of a company that insist on a Tax Invoice before payment.

[Mike C]

An abridged or estimated invoice sent by a seller to a buyer in advance of a shipment or delivery of goods. It notes the kind and quantity of goods, their value, and other important information such as weight and transportation charges. Pro forma invoices are commonly used as preliminary invoices with a quotation, or for customs purposes in importation. They differ from a normal invoice in not being a demand or request for payment. (from the Business Dictionary)

Proforma Invoices are my pet hate. Basically they are a quote and hold no legal value. They certainly are not recognised by SARS as being a TAX Invoice and if you claim VAT on a Proforma Invoice, and are audited, it will be disallowed.

I accept the fact that there is a place for them. However ...

The problem for me arises in that we pay VAT monthly. Some companies issue a proforma invoice for something with the expectation of payment or part-payment up front. We pay. We wait.

In the mean time something has to be entered into the accounting system to match the payment made, but VATnow becomes an issue as we don't have the proper Tax Invoice.

VAT Month closes ... we do our VAT return. Finally the Tax Certificate arrives (after much asking) and there is no obvious matching of the documents. If audited, I am asked why I claimed VAT on a proforma. I show the actual invoice, but it does not match the Invoice Number entered into the Accounting system, and the date differs. Problem!

If one is going to use a Proforma Invoice, I think that when the payment is made, a Tax Invoice for the SAME DATE should be made out and sent immediately so that records can be kept clean. Alternatively an entry on the Tax Invoice stating that it replaces Proforma Invoice No: 123 would be a big help.

[Elijah]

Please see the following link

http://www.e-conomic.co.uk/accountingsystem/glossary/proforma-invoice

It's worth noting [regarding your query], that the article says Proforma Invoices are not recorded as accounts receivable by the seller, or accounts payable by the buyer

[IMHO]

So, what to do? I can issue a Tax Invoice from word go, but that will still not be acceptable to SARS to claim, because it will indicate a due amount and not a paid amount. Once the Invoice is paid, I can issue a Paid invoice.

In any case, my Proforma invoice is the same date and number as my tax invoice. I just replace the 'Proforma' with 'Tax' and is issued immediately on receipt of payment. I also need to capture this document and can not capture a pro-forma invoice.

[Elijah]

You have asked a very intersting question: just read this article:

Invoices[edit]

In trade transactions, a pro forma invoice is a document that states a commitment from the seller to sell goods to the buyer at specified prices and terms. It is used to declare the value of the trade. It is not a true invoice, because it is not used to record accounts receivable for the seller and accounts payable for the buyer. Simply, a 'Proforma Invoice' is a Confirmed Purchase Order where buyer and Supplier agree on the Product Detail and cost to be shipped to buyer. A proforma invoice is generally raised when the seller is ready for dispatching the material but he wants to ensure that the payment is being sent before dispatch. And similarly, the customer also wants to know what all other components are there in the Proforma invoice to avoid disagreements later. A sales quote is prepared in the form of a pro forma invoice which is different from a commercial invoice. It is used to create a sale and is sent in advance of the commercial invoice. The content of a pro forma invoice is almost identical to a commercial invoice and is usually considered a binding agreement although the price may change in advance of the final sale.

The content of a pro forma invoice is almost identical to a commercial invoice and is usually considered a binding agreement although the price may change in advance of the final sale.

I think the last comment gives the distinction between a proforma invoice and a quotation. "Binding agreement". Would like to hear what others have to say, some with a more legal background to mine.

[Elijah]

I think what you doing is correct to issue a proforma invoice, [which is legally binding], according to the articles: http://en.wikipedia.org/wiki/Pro_forma.

Mike C advise is good:

If one is going to use a Proforma Invoice, I think that when the payment is made, a Tax Invoice for the SAME DATE should be made out and sent immediately so that records can be kept clean. Alternatively an entry on the Tax Invoice stating that it replaces Proforma Invoice No: 123 would be a big help.

I also need to capture this document and can not capture a pro-forma invoice.

Pretty sure your accounting software can be adjusted to include this, what software are you using?

[IMHO]

I just realized I am wrong about my Invoice number. My Proforma does not have a number. That is why I started using proformas. When I issue a Tax invoice, that Tax Invoice number comes from the accommodation register. (Checking in register) If the transaction does not happen, I must cancel that invoice. This happens a lot and I hate canceling docs, it just leads to more opportunities for fraud.

So I only allocate the invoice number once everything is confirmed, paid and the register is filled in.

[Mike C]

The content of a pro forma invoice is almost identical to a commercial invoice and is usually considered a binding agreement although the price may change in advance of the final sale.

Not too sure how it can be legally binding if the price can be changed ...
It also does not make sense that it can be legally binding if the recipient does not pay or changes their mind about the booking.

For me, though, it is not so much about the agreement between the seller and buyer, but the VAT implications and the SARS requirements when it comes to Tax Invoices.

[HR Solutions]

I'm with you on that one Mike. If you read the wikepedia quoted text again tho it says "binding" under Invoices, Not "legally" binding. I tend to think that this has a slight difference. Not quite sure how tho. Perhaps binding in the sense that you have ordered the products on the Pro-Forma, but not yet paid for it, therefore not legally binding because you have not taken receipt of the goods at that point.
We also have to remember that wikepedia is not a trustworthy source either.

[Elijah]

Hi

There can only be one interpretation of the word binding and that is "legally" binding, given the context. If the context was chemistry then it would be chemically binding. But also aknowledge that wikepedia is not an absolute source , but it is a good source of info, which is why I said a legal expert would have to answer this one, the article merely adds clarity and gives one a direction

[HR Solutions]

Well I see two interpretations. Legally binding is a contract signed and witnessed by both parties and cannot be changed unless both agree. A pro forma invoice means that the goods my be dispatched and it is binding on you, if you accept it, but you can still change your mind.

Therefore you are legally bound by a signed contract, but not by a pro forma invoice.

[Elijah]

Hi IMHO

I think you absolutely correct and they need to be educated:

I am in the accommodation business and issue a proforma invoice to clients to do pre-payment. Then, when I receive the payment, I issue a Tax Invoice. That is my understanding.

One could move from the Quotation straight to Invoice and skip the "proforma invoice" stage, but the "proforma invoice makes sense when there is a delay between the time of order and the delivery of goods [e.g shipping or between cities, and as in your case accomodation - there is a time delay here, so this would warrant a proforma invoice]

One option you could add is to get the "user" of your accommodation to sign the proforma invoice and include their details [i.e address or Id no/ck number - whichever is applicable], this way you will reduce the chances of fraud.

Other points to consider:
1.Another point is quotations are are prone to be changed and proformas are less likely if the quotation phase was done thoroughly.
2. If a customer pays cash on delivery of goods or soon after their stay is complete then a " Cash Invoice" is issued this is different to a Tax Invoice [a tax invoice implies terms i.e 30 days after invoice date etc, the format and layout of "cash invoice" and tax invoice is the same only the name "cash invoice" versus "tax invoice".
3. Most business don't like extra paper work unless it assists the business process or is required legally
4. Just like you would only grant terms to businesses that you trust, the same would apply to your use of proforma invoices and the consideration amount, at the end of the day you would need to weigh-out each situation as the scamsters are always innovating.
5. In the bigger picture a signed proforma invoice would provide you with documentary evidence. along with other applicable documentation.

[Mike C]

2. If a customer pays cash on delivery of goods or soon after their stay is complete then a " Cash Invoice" is issued this is different to a Tax Invoice [a tax invoice implies terms i.e 30 days after invoice date etc, the format and layout of "cash invoice" and tax invoice is the same only the name "cash invoice" versus "tax invoice".

"Tax Invoice" implies that there is VAT involved. A client who can claim VAT back will not be able to claim if they receive a "Cash Invoice". SARS is very clear on this point.

[HR Solutions]

Another point is quotations are are prone to be changed and proformas are less likely if the quotation phase was done thoroughly

Not unless you are buying something via Game or Incredible Connection etc, they will give you a Pro-Forma which can either be ignored if you are not going to buy it or changed if you change your mind to another product. A pro-Forma will be given if you would like to claim from Insurance for example. Once again a non binding or non legal document between yourself and the company giving it in the sense they cannot hold you to it.

[Elijah]

@ Mike C

"Tax Invoice" implies that there is VAT involved. A client who can claim VAT back will not be able to claim if they receive a "Cash Invoice". SARS is very clear on this point.

Perhaps I wasnt clear enough, bot are "Tax Invoices" however one is a Credit Sale and the other a Cash Sale, and the relevant description should be shown on the document

Not unless you are buying something via Game or Incredible Connection etc, they will give you a Pro-Forma which can either be ignored if you are not going to buy it or changed if you change your mind to another product. A pro-Forma will be given if you would like to claim from Insurance for example. Once again a non binding or non legal document between yourself and the company giving it in the sense they cannot hold you to it.

You would find the shipping Industry to be very very different, I dont think small purchase such as from Game would warrant the unnecessary additional paper-work, as I mentioned previously there must be good reason for a Proforma Invoice, otherwise, it begs the question why the extra hassle?