In Latin, pro forma is a word which is used to describe a practice or document which is provided as an extended measure of courtesy or in case where it conforms to certain norms or doctrine. In other words, it is used often as a formality. In business world, pro-forma is used in various aspects such as pro forma financial statements, pro forma invoices, pro forma accounting. In legal fraternity, pro forma court rulings are meant to facilitate the legal process.
Dictionary definition of pro forma invoice: In dictionary words, a pro forma invoice is an abridged or estimated invoice which is produced by a seller in advance of a purchase made by the buyer and has parameters such as weight and transportation charges, kind and quantity of goods and their value etc.
A Pro Forma invoice is not considered as an actual invoice and it differs from the later one in the sense that it is not produced in request for the payment made by the buyer and it is a way used by the buyers to know the complete details of their purchase because a pro-forma invoice will break down everything which a buyer need to know and one should make sure that he has understood each and every part of the pro-forma invoice before he signs on the same. It can also be understood as an Order Confirmation or a commitment on part of the seller to deliver the mentioned products or services as per the cost mentioned in it and thus a seller cannot register pro forma invoice as an accounts receivable and conversely the buyer cannot use the same as an accounts payable.
In some countries, you need to produce an actual invoice in front of the bank to obtain an Importation Permit but since you cannot get one unless the products are actually shipped. So, in this case you can use Pro Forma Invoice to avoid any unnecessary delays in getting the actual funds or to obtain the required Importation Permit.
As per Her Majesty’s Revenue and Customs (HMRC): A pro-forma invoice is not a VAT invoice and former one should clearly be marked with such clear words so that it is not mistaken as a VAT Invoice in any case, such as “This is not a VAT Invoice”. HMRC has made it very clear as in when to issue a Pro Forma Invoice and when to issue a VAT Invoice i.e. In case the buyer has made the actual payment against goods or services delivered by you, a transaction has taken place and if the mentioned goods or services are registered for VAT, you need to produce a VAT invoice. A Pro-Forma invoice cannot be produced at this point of time.
When a payment has been made by the buyer before the goods or services are supplied, it is important both for the buyer and the seller to understand where tax occurs because it is at that tax point, one need to understand which VAT returns the transaction should be included on. As per HMRC:
- In case the payment is done before the supply of goods or services, the tax point mentioned on the invoice is the date on which the payment has been received. However, for your own convenience, you can have two dates on the invoice i.e. tax point date and invoice date.
- In case the VAT invoice has been issued for more than 15 days of the original date of supply, the tax point is the date of supply and not the date of the invoice and in case your business uses VAT Cash Accounting Scheme, the tax point will be the date on which the payment is received.
- Pro Forma invoices, apart from giving a broad knowledge of the product or services and its various parameters, have various other advantages as well, such as:
- In case you do not have all the details for a commercial invoice, you can opt for pro forma invoice.
- A pro forma invoice is ideally used to declare the value of goods for customs for a smooth delivery process.
- It is also considered as a good faith agreement so that your customer knows what to expect.
- Many businesses use pro forma invoices for their internal purchasing approval process.
- In order to issue a Pro-Forma invoice, you as a seller must receive a purchase order from the buyer with following information:
- Purchase Order number or reference.
- Ship-to and Bill-to contact name(s), company organization name(s) and address (es).
- Each item to be purchased with requested delivery date(s).
- Recipient’s shipping account number (if applicable)
Is Pro Forma Invoice a Legal Document?
A Pro Forma Invoice is a legally binded document which is issued in the same format as an original invoice. In addition to the cost of the goods or services catered for, it has all the possible details of the same.