Add your own tax rates in Xero to charge or record sales tax on your invoices, bills and transactions. The tax rates you need depend on the default rates available in Xero and your country's tax requirements. Each tax rate can have multiple components and you can have as many rates as you need. For example, sales tax, and state tax. In the next step, you can apply default tax rates to accounts in your chart of accounts. You can access the tax rate and Chart of Account information outside the Setup Guide to complete or update it when you want.
Your previous sales tax returns might be a good source of information for the taxes to set up in Xero for tax reporting. Depending on your tax requirements, you might not need to add new tax rates. The tax components display on the PDF invoice or bill.
Default tax rates
Default sales tax rates are available in Xero when you first set up your organisation. You can edit them and add your own custom rates.
You can run the Sales Tax Summary to see total sales tax for a period by tax rate or tax rate component.
Xero might call sales tax something different depending on your organisation's country. For example, South African organisations show VAT on their reports and screens in Xero.
If your organisation is based in Singapore or South Africa, Xero provides tax rates relevant to you. Using them brings through the correct codes to your IAF audit file (Singapore) or VAT files (South Africa).
Export an IAF audit file (Singapore)
How and where are tax rates used?
Each line item you enter in Xero (whether these are items on sales invoices you are sending to customers, bills you are receiving from suppliers, bank transactions to record money you have spent or received, manual journals or expense claims) has a tax component.
- All tax recorded in Xero is reported in the Sales Tax Report so you can see how much tax you've charged or paid at anytime. Depending on how you set up your tax rates, this report will be for single rates or each component that makes up a tax rate.
- The basic tax rates provided by default are a sales tax rate for purchases, for sales and for items that attract no tax.
- The default rates are all set to 0% by default and at the very least you can change this percentage to match the rate required by your country for sales and purchases.
- The 'Accounts using this Tax Rate' column refers to the accounts in your chart of accounts that will use these rates by default. This means that whenever you 'code' a transaction to a particular account, for example, Sales, a preset tax rate will be applied automatically. Click on the number of accounts using a tax rate to see all the accounts in the chart of accounts that are using that rate. The padlock icon shows on locked tax rates, which can't be deleted. A locked rate will be currently in use in your organisation, either as a default rate on one of your accounts, or on a repeating invoice or bill.
- If you don't want to use the default tax rates, you can create your own and apply them as the default for accounts in your chart of accounts. You can use any Tax Rate on any invoice, bill or transaction regardless of whether it is the default rate on an account.
- The only tax rates you can't change or delete are:
- Set up your chart of accounts and any specific default tax rates in the next step.
- In the chart of accounts you can choose if you want your tax rates to be the default tax rate on certain accounts so that that amount of tax is calculated on a transaction whenever the account is used.
- If you want to import a chart of accounts, you need to make sure you have all the tax rates you want to use set up before using them in the file you import. If the tax rates on an imported file can't be found in Xero, they'll default to 'Tax Exempt (0%)'. You can update the rates on accounts later in the chart of accounts when you've set up the required tax rate.
Add a tax rate
Use the New Tax Rate button to add your own tax rate into Xero. The tax requirements of your country, region, state or city and the tax that you need to charge or record will determine how many tax rates you have. These may be tax rates on income or expenses depending on what type of transactions you are going to enter into Xero.
- Each tax rate or your combination of tax rates and how you use them in Xero will be as simple or complex as you make them to correctly record sales tax for your business in the country you're in.
- A tax rate can have one or more components.
- Click the New Tax Rate button to create a new tax rate and complete the fields for name, components, and rate.
Tax Rate Display Name
This is the name that identifies the tax rate used in the chart of accounts or on transactions you're entering into Xero. It's only shown within Xero, so your customer only sees the final tax % and breakdown by component on the PDF invoice. You can include the rate's percentage in the name to help identify it.
Whenever a list of tax rates is presented in a list, in a transaction, or on a report, this is the name used.
- If you have several tax rates using the same percentages but you'd like to distinguish between them, give them different display names.
- Depending on how many tax rates you're going to have (for example, several for each different type of sale you make including sales to different states, regions, countries or type of organisation) and the different percentages these rates might be, you might like to think of the naming convention you're going to use in Xero. You can use both letters and numbers in the name if you want to use some sort of code to name your rates.
- If you want to use different tax rates for sales and expenses or different rates depending on the type of sales or expense, or the tax rates contain different components, you should take this into consideration when creating a name for your tax rate.
- When you are entering a transaction, you'll only be able to see the name of the rate, not how the rate is made up.
Every tax rate has at least one component. This is the actual percentage rate applied to an item when you use the rate. Typically it's a rate set by your tax authority. The overall tax rate can be made up of many components. It's the overall percentage rate that's used to calculate the tax and displayed on the invoice PDF.
When using components for different tax rates, it's important to use the same name so the tax for all transactions using the component is reported in one amount in the Sales Tax Report. Every version of a name (e.g. City Tax, CityTax, City Tax Rate) is treated and reported as a different component, even if their rates are all the same. So you'd have to add them together to work out the total component tax. You can export the report to Excel for further manipulation if required but any changes in Excel won't be 'saved' back into Xero.
Enter the name of the tax component that makes up the tax rate and the percentage rate. The component name might be different to the overall tax rate name that you refer to on transactions as it is likely to be the specific name for the type of tax you're including in the overall rate.
- If the component is a standard component to be used whether you're selling or buying goods, use the same component name regardless of what you've called the tax rate, for example, if you charge as part of a Goods Sold tax rate and pay as part of a Goods Purchased tax rate, name the components the same. Use the overall tax rate name to distinguish between the different tax rates to choose when entering invoices, bills or transactions.
If applicable in your country or state, you can create an overall tax rate that is made up of many different component rates that display on your invoices or bills and can be separately reported on. Use the Add a component button to add as many components as required to make up the total Tax Rate, for example, Your 'Tax on Sales' rate is made up of 'City', 'State' and 'Environment' tax. Again, if you're using the same component as part of other tax rates, use the same component name each time.
The tax rate on the invoices and credit notes you send to your customers will show the tax components and their component rates. Each different tax component rate will be listed in the subtotal. The Tax Rate Display name is for your reporting and identification purposes in Xero only.
That is, the full tax rate name and percentage displays on the invoice in Xero, but only the individual components display on the PDF invoice.
- Add up to six components to a tax rate.
Xero calculates tax for rates that have more than one component by totalling up all the components and applying that overall rate to the line amount. The overall rate is automatically appended as a percentage to the tax rate name after you've saved it for your quick reference. For example, a rate that has components 5% and 7% will be applied to the line item as 12%.
- Once the invoice is approved in Xero the components making up the total rate will be listed in the subtotal - and this is what your customers will see on their invoice PDF.
If you have more than one component, any one of the components can be a compound rate. The compound rate will be calculated on the transaction or invoice subtotal after other tax components in that tax rate have been applied to the line item. Tax rates with a compounding component will have an overall effective tax rate that will be used to calculate the tax on a line item - the effective rate already has the compounding component calculated on the other components that make up the overall rate.
If you are entering transactions or invoices that use different overall tax rates for each line, you will see the tax calculated on each line item and shown in the Subtotal as you go, whether you have tax rates that contain one component, multiple components or multiple components with a compounding rate.
- Use the Save or Cancel button to save or ignore any changes made to your Tax Rate.
- If you have multiple components, use the 'X' icon next to a component to delete it from the Tax Rate. If you want to delete a tax rate completely you need to do this from the list of Tax Rates.
Edit a tax rate
Click any tax rate listed to edit it. Editing a tax rate is the same as adding a Tax Rate.
You can edit the following:
- Locked tax rates (tax rates with a padlock icon next to it), as long as it was not used in a transaction
- Tax rate name (even if it is used in a transaction)
- Component names (even if they are used in a transaction)
- Components of the tax rate (delete a component by clicking the X next to it)
Tax rate percentage
You can't edit the following tax rates:
- Tax Exempt (0%) as it is used by Xero system accounts
- Sales Tax on Imports as it is reserved specifically for reporting sales tax that is fully refundable
- Tax rates and fields that are greyed out
Sales Tax Report
- The sales tax calculated using each different rate and component is shown on the Sales Tax Summary. You can view the summary report by tax rate or by component. The Sales Tax Audit shows each transaction for the period by sales tax rate.
If the components are all the same regardless of the tax rate they belong to then all tax collected or charged at that rate will be kept together for reporting purposes. Xero treats each different component name as a different component and will report on them separately. This excerpt from a Sales Tax Summary shows how City Tax and State Tax are reported both as components of a Tax Rate and as components in their own right.
Delete a tax rate
Select the checkboxes for the rates you want to delete, then click Delete.
- Any tax rate you've entered can be deleted, unless you've assigned it as a default tax rate to an account.
The following tax rates are locked by default:
You can't delete locked tax rates, but you can unlock them:
- Remove the rate from the accounts it's attached to in the chart of accounts.
- Delete the repeating invoice schedule from the Sales or Purchases Repeating tab.
- Use the padlock icon.
- You can delete an unlocked tax rate that was used in a transaction. Transactions that used the rate aren't affected. The rate isn't available to select on transactions or apply to accounts.