Recently, I asked Uriel Shuraki of Made in JLM, for post ideas. He immediately responded with a request for an article about the difference between a price quote, a pro-forma invoice, a tax invoice and a receipt. No problem! said I. Of course, I soon realized that one could write a full article about each one. That’s now on my to-do list, where it shall likely stay for a good, long while. For now, an overview.
For the non-Israelis among you, the below is quite Israel-specific. Please check with your accountant for the rules of the road by you.
A word of warning: this is a slightly longer article than I normally post. I decided to keep it all together as the information makes a lot more sense provided in one fell swoop than over several articles.
Price Quotes (hatza’at mechir הצעת מחיר)
A price quote is an offer to a potential customer to provide services or goods at a certain price or rate. Quotes should include enough information for the customer to be able to make an informed decision about whether they want to buy. The quote should include details such as: what the customer is to receive; how, when and where they are to receive it; any other key terms or limitations (e.g. “don’t poach our employees or our software”); how much this is all going to cost and/or how the final price will be calculated. If your quote does not include VAT make sure to say that VAT will be added. Otherwise, the potential customer is liable to assume that the quote is inclusive of VAT, a situation liable to create some unpleasantness when you present the invoice once the work is complete.
Tax Invoice (heshbonit mas חשבונית מס)
Tax invoices are official records of sale transactions. Israeli tax law requires that invoices include a series of details about the sale. The main details can be roughly summed up as: who sold what to whom, when and where this all went down, how much it cost and the VAT (ma’am מע”מ) added. If you are using Mas Hachnasah approved accounting or invoicing software, it should walk you through the process of making sure that all required information is included.
VAT-registered businesses (osek morshe עוסק מורשה) must issue tax invoices for all transactions, even if they issued a pro-forma invoice first (more on that below). The form a tax invoice takes and when you issue it will vary based on the type of business you are in and how you get paid. If your company issues invoices either at the point the services or goods are provided or periodically during the service period but only gets paid at some later date (probably late, yes?) then your invoice will double as a request for payment, and should include payment terms and bank details in addition to the transaction details. If, on the other hand, your company normally receives payment at the time the product is provided or service is performed (e.g. you’re a technician who receives checks from customers on the spot or a retailer issuing cash register receipts ) then your invoice may include a receipt (again-more on that below) or you may choose to send a separate receipt later.
And now to get into slightly hairier territory…the “tax” in “tax invoice”. Issuing a tax invoice creates a “tax point”, that is, the date the transaction took place for tax purposes. Once you have a tax point, that puppy is officially taxable (yay!). So, you will need to include it in your VAT and income tax (mas hachnasah) submissions and payments for that period and your customer will be able to include in their VAT report, and claim the VAT they were charged back. This is as opposed to a…
Pro-forma invoice (heshbonit iska חשבונית עסקה)
…which isn’t taxable quite yet. It’s a tax transaction in training. 🙂
Pro-forma invoices are also records of sales transactions and requests for payment of the amounts due. You have to include a lot of the same information that you would on a tax invoice. However, unlike tax invoices, pro-forma invoices don’t create a tax point. Pro-forma invoices allow the issuer to delay paying income tax or VAT related to the sale until they receive payment from the customer.
So, who can issue a pro-forma invoice? Technically, anyone can issue a pro-forma invoice as a request for payment.
HOWEVER, customers are then entitled to turn around and demand a tax invoice before paying.
HOWEVER, there are exceptions to this. There are two groups of businesses that can thumb their noses at any such requests and say “pay up, buckaroo!”
- VAT-exempt small businesses (osek patur עוסק פטור) are not allowed to issue tax invoices and, in fact, are not required to issue invoices at all.
- VAT-registered businesses (osek morshe עוסק מורשה) that are allowed to do so (delay issuing a tax invoice until payment is received). See here for detail.
In the case of Group #2, it is flat out illegal to demand a tax invoice in advance of payment, if they choose to issue a pro forma invoice up front. In the case of Group #1, it’s just an exercise in futility (as well as possibly illegal), as they aren’t allowed to issue one in any event.
Fun factoid! Per Wikipedia, the reason for Mas Hachnasah allowing Group #2 to delay was because a lot of companies tend to insist on receiving tax invoices before paying bills. As discussed above, these create a tax point at which point you have to pay in tax. Now, if you are a Great Big Corporation, that’s probably not a big issue. However, if you are, say, a consultant or small business, having to pay in the VAT and taxes month(s) before you actually see any money can create major cash flow issues. So the VAT Law was amended to not only allow certain types of companies to issue pro-forma invoices, but also to make it a crime to demand a tax invoice from an eligible company in advance of payment.
Proof that Mas Hachnasah is just kinda sorta awful as opposed to purely evil. 🙂
Receipt (kabala קבלה)
A receipt is confirmation that payment has been received. Receipts should be issued on receipt of payment for goods or services. Similar to invoices, receipts should include details about the payment. Key terms include: who received the money; when payment was received; how much was received, how payment was tendered (e.g. check, cash, wire transfer) and what the payment was for.
Friendly reminder: if you are a VAT-exempt small business, an invoice is not required, but the receipt is!
Tax Invoice-Receipt (heshbonit mas-kabala חשבונית מס-קבלה)
This is all the goodness (and detail) of an tax invoice and a receipt in one fabulous and efficient document! These can be issued instead of a standalone tax invoice and receipt on receipt of payment for a pro-forma invoice or where the payment is received at the point of service.
My thanks to Binyamin Radomsky of Aboulafia Avital Shrensky & Co for his help with this article.