Quotation, proforma or invoice? What to send, and when

A customer asks, “Can you send me something?” Do they want a quotation, a proforma invoice or a proper invoice? The three look alike on paper, but they mean different things, and the difference matters for tax. Send the wrong one and you can end up paying sales tax, VAT or GST on a sale that never happened, or with a customer who cannot reclaim the tax they paid you. Here is what each one is, as it is used around the world, and when to send it.

Quotation or estimate: a price offer

A quotation tells the customer what you will charge for a job, before they agree to it. It lists the work or goods, the price, the tax, and how long the offer is valid. It is an offer, not a sale. Nobody owes anybody anything yet, so it is not a tax document anywhere.

In the US, most businesses call this an estimate. Some trades use both words: an estimate is a best guess that can change, and a quote is a fixed price. If you use them that way, say so on the document, so the customer knows whether the number can move.

Send a quotation when the customer is still deciding: a new client, a big job, or anything where the price needs to be agreed first. Always put a “valid till” date on it, so an old price does not come back to bite you months later.

Proforma invoice: a request to pay first

A proforma invoice looks like an invoice but is not one. It says, “This is what the final bill will be. Please pay this, or part of it, before I start.” Businesses use it to ask for an advance, because the customer needs a document to get the purchase approved, or for customs and import paperwork when goods cross a border.

In most countries a proforma is not a tax invoice. It does not count as a sale, and a buyer cannot use it to reclaim VAT or GST. Mark it clearly as “Proforma invoice”. In the UK, HMRC's guidance is to also write “This is not a VAT invoice” on it. Once you actually supply the goods or services, you still issue a proper invoice.

Invoice: the real bill

An invoice says a sale happened and the customer owes you money. It is the document that counts for tax. In countries with VAT or GST (the UK, the EU, the UAE, Australia, Singapore, India and many more), a registered buyer uses your invoice to reclaim the tax they paid you, so it must carry the details the law asks for: your tax number, often theirs, an invoice number in your series, the date, and the tax rate and amount. In the US there is no VAT, but the invoice is still your record of the sale and of any sales tax you charged.

Our guide to what every invoice must show lists the details country by country. If you bill a customer in another country, the tax can change completely; see billing clients abroad.

Credit note: fixing an invoice you already sent

Once an invoice is issued, do not edit or delete it. If the customer returns goods, you give a discount after the sale, or you charged too much, you issue a credit note against that invoice. It reduces what the customer owes and the tax you report.

Side by side

The usual flow

1. Send a quotation with a clear price and a “valid till” date.
2. When the customer says yes, note it, so you do not lose track of what was agreed.
3. When you deliver, turn the quotation into an invoice with the same lines and prices.
4. Send the invoice with a pay link and follow up if needed. See payment reminder messages.

The step people skip is the third one. Retyping a quotation into an invoice by hand is where prices change by mistake and lines go missing. It is better when the invoice is made from the quotation itself.

What if you want an advance?

Openn Invoice does not have a separate proforma document. Pick one of these two options, and be clear with the customer about which one you sent:

• Send a quotation and ask for the advance against it. Say the amount in the note, for example “50% advance to start the work”. Like a proforma, the quotation is not a tax invoice, so it does not count as a sale.
• Issue the invoice now and record the advance as a part payment. The invoice shows Part paid and the pay link asks for the rest. This is a real invoice: it counts as a sale for tax from the day you issue it, so only do this when it matches how you actually supply.

Be aware that in many countries the advance itself can make tax due, whatever document you send. The notes below cover the main cases. Rules change and depend on your business, so check with your accountant.

In the UK and EU

When you receive a payment before you supply, that payment usually creates a tax point: VAT is due on the advance from the day you get it. Most EU countries work the same way.

In the US

Sales tax is set by each state, and in many states some services are not taxed at all. It is usually charged on the sale itself, but the rules for deposits differ from state to state.

In India

• A proforma invoice is not a tax invoice under GST. It does not go in your returns, and the buyer cannot claim input tax credit on it.
• For services, GST is generally due when you receive an advance, and the law expects a receipt voucher. For goods, most suppliers do not pay GST on advances.
• GST sets time limits for issuing a tax invoice, which differ for goods and services, and a deadline for credit notes in each financial year.
• Composition dealers issue a bill of supply instead of a tax invoice, because they cannot charge GST.

These rules have changed before. Ask your CA how to handle advances in your business.

The short version

• Quotation or estimate: a price offer. Not a sale, not a tax document.
• Proforma invoice: a request to pay first. In most countries, not a tax invoice.
• Invoice: the real bill. It counts for sales tax, VAT or GST.
• Credit note: reduces an invoice you already issued. Never edit an issued invoice.
• Advances can make tax due on their own. Check with your accountant.
• Make the invoice from the quotation, so nothing changes by mistake.