Deposit invoice: what it is and when to issue one

A deposit invoice is a request for part-payment, issued before work starts, for a job the customer has already agreed to. It is most common on custom or made-to-order work, where the supplier buys materials or commits production time that cannot easily be recovered if the customer walks away. The deposit is usually a percentage of the order value, often 25% to 50%, and the final invoice later shows the full price with the deposit deducted.

Why suppliers issue a deposit invoice

Made-to-order goods carry real risk. A printed, embroidered or engraved product has no resale value once it carries one customer's artwork, and a supplier may have paid for blanks, set-up and a production slot before the customer has paid anything. A deposit covers part of that outlay and shows the customer is committed. It also brings cash in earlier, which matters for a small business running several jobs at once.

The deposit terms should be agreed up front and stated on the quote and the invoice. Say whether the deposit is refundable, when the balance falls due, and what happens if the order is cancelled after production has started.

Deposit invoice and VAT: why a proper invoice matters

In the UK, a deposit or advance payment for goods or services you will supply later usually creates a VAT tax point. The tax point is generally the earlier of the date you receive the payment and the date you issue the invoice. You then account for VAT on the amount of the deposit in that VAT period, even though the job is not finished. The rules differ in other countries, so check local requirements.

Because of this, a deposit request should be a proper VAT invoice, not an informal email or a note on the quote. It should show the supplier and customer details, a description of the order, the net amount, the VAT and the total. The VAT-registered customer then has a valid document for reclaiming input VAT. A genuinely refundable security deposit, such as a returnable hire deposit, is usually treated differently, so the wording matters.

Worked example: GBP 1,000 deposit on a GBP 4,000 order

A merchandise distributor agrees a branded merchandise order worth GBP 4,000 plus VAT at 20%. The terms require a 25% deposit.

• Deposit invoice: GBP 1,000 net + GBP 200 VAT = GBP 1,200 due before production starts.
• Final invoice, raised on delivery: GBP 4,000 net + GBP 800 VAT = GBP 4,800 in total.
• Less the deposit already invoiced and paid: GBP 1,000 net + GBP 200 VAT = GBP 1,200.
• Balance due: GBP 3,600.

The formula is: balance due = total order value (including VAT) - deposits already paid. The VAT on the deposit was accounted for in the earlier period, and the final invoice only adds the VAT on the remaining GBP 3,000.

Deposit invoice versus pro forma invoice

A pro forma invoice is a preliminary document that is not a demand for VAT purposes, so it does not normally create a tax point on its own. A deposit invoice is a real invoice and goes into the sales ledger. If the customer pays against a pro forma, the supplier still has to raise a VAT invoice once the payment arrives. For deposits, raising a proper deposit invoice from the start avoids that second step.

A deposit invoice also differs from a stage payment. A deposit is taken once, at the start. Stage payments are spread across milestones during a longer project.

Common mistakes

• Starting production before the deposit has cleared.
• Leaving the VAT on the deposit out of the VAT return for the period it was received.
• Failing to deduct the deposit from the final invoice, causing disputes or double payment.
• Not stating on the invoice whether the deposit is refundable.

Invoicing software that links the deposit invoice to the original quote and the final invoice keeps these figures consistent. Zigaflow's invoices feature is one example.