Add your own tax rates in Xero to charge or record VAT on your invoices, bills and transactions. Each tax rate can have multiple components and you can have as many rates as you need. You can apply default tax rates to accounts in your chart of accounts.
Your previous VAT returns might be a good source of information for the taxes to set up in Xero, and report to HMRC. The tax components display on the PDF invoice or bill.
Default tax rates
The most commonly used tax rates are already set up in Xero.
These rates have default settings determining where transactions that use these rates are reported on the VAT Return - you might like to review this before editing the default rates or creating new rates. You can add your own rates as necessary if the default rates do not meet your needs, or edit the default rates - pay particular attention to the 'Tax type' as this determines how these rates are reported. It may be best to contact your accountant or bookkeeper if you are unsure of how to set your tax rates up. The default tax names and their rates set up in Xero are:
|20% (VAT on Expenses)||20%|
|20% (VAT on Income)||20%|
|5% (VAT on Expenses)||5%|
|20% (VAT on Income)||5%|
|EC Acquisitions (20%)||0%|
|EC Acquisitions (Zero Rated)||0%|
|Reverse Charge Expenses (20%)||0%|
|VAT on Imports||0%|
|Zero Rated EC Goods Income||0%|
|Zero Rated EC Services||0%|
|Zero Rated Expenses||0%|
|Zero Rated Income||0%|
You'll also have these additional default rates if you use the flat rate VAT scheme:
|20% VAT on Capital Sales||20%|
|20% VAT on Capital Purchases||20%|
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 on in the VAT Return and the VAT Audit Report so that at anytime you can see how much tax you've charged or paid. You might like to take a look at how the tax rates used on transactions are reported, especially those you create yourself and rates that don't attract VAT to ensure tax is carried through to the right boxes on your Return.
- The default list of rates displayed are those already provided by Xero based on standard UK VAT rates provided by HMRC. You can edit these and add your own custom rates as required.
- 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:
- 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 the rates used in the file also exist in Xero before you import your file. If the tax rates on an imported file can't be found in Xero, they'll default to 'No VAT (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 additional 'custom' 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 for your business.
- A tax rate can have one or more components and is of a particular 'tax type' so that it is included in your VAT Return calculations.
- Click the New Tax Rate button to create a new tax rate and complete the fields for name, type, 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 % 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.
The tax type, regardless of the percentage or components, determines which boxes on your VAT Return the VAT portion of transactions that use this rate are reported - refer to VAT Return - box calculations. Take note of the boxes Xero will report rates such as those for the EC or exempt rates, so that your VAT and overall sales/purchases are reported correctly.
The tax types available are:
- Exempt Sales
- Exempt Purchases
- EC Sales Goods
- EC Sales Services
- EC Purchases
- EC Acquisitions
- Reverse Charges
- MOSS Sales
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 (this is unlikely in the UK). It's the overall percentage rate that's used to calculate the tax and displayed on the invoice PDF.
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.
- UK tax reporting doesn't require a breakdown beyond the overall tax rate so even if you use multiple components, it is only the overall rate that is displayed on transactions and shown on your VAT Return (according to its Tax Type) in Xero.
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 overall tax rate displays 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. For example, a rate that has components 5% and 7% will be applied to the line item as 12%.
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
Make sure you only change the percentage of any default rate if this is appropriate to the VAT you need to report to HMRC.
You can't edit the following tax rates:
- No VAT (0%) as it is used by Xero system accounts
- VAT on Imports as it is used by the VAT Return for tax that is fully refundable
- Tax rates and fields that are greyed out
- The VAT calculated using each different rate is added to the VAT Return into the box where the 'tax type' for that rate is reported. The VAT Audit report shows a breakdown of each tax rate used in the VAT period.
Refer to How does the VAT Return work in Xero? to see which tax types are picked up in the calculation of VAT for each box on the Return.
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.