Accounting for VAT on Proforma Invoices

What is a Proforma Invoice?

A proforma invoice is a preliminary bill of sale sent by a supplier before goods or services are delivered. It is not a VAT invoice, and no VAT can be claimed based on it.

2 key points to remember:

1. The invoice should clearly be labelled ‘Proforma Invoice’ in Xero.
2. This is not deemed as valid documentation to reclaim VAT.

Posting a Proforma Invoice in Xero

When you receive a proforma invoice, you should record it in Xero just like any other bill:

1. Create the bill as you normally would.
2. In the VAT field, select the Zero-Rated VAT option.
3. In the reference or invoice number field, add “PROFORMA” to the invoice number. This makes it easy to identify and exclude these from your VAT return later.

When you receive the tax invoice

When you receive the final tax invoice, you must update Xero as follows:

1. Edit the original bill in Xero.
2. Attach the new tax invoice as a supporting document.
3. Update the VAT field to 20% VAT on purchases, if applicable.

Communicating with Your Client

When preparing the VAT return, you should inform your client about any outstanding proforma invoices. Explain that the VAT on these has not been reclaimed and that this can only be reclaimed once the tax invoice has been received.