Choose the right tax treatment and tax rate on your transaction
The tax treatment and tax rate determine whether a transaction line item is included in your VAT returns and, if so, how Xero classifies it. You choose the tax treatment and tax rate when you enter the transaction.
How tax is calculated
Xero calculates the VAT on each transaction line, rounding each line amount to two decimal places. The TotalVAT is the sum of the separateVAT. Sometimes this may mean the TotalVAT differ slightly from a percentage amount calculated on the transaction total. While Xero doesn't let you adjust the VAT, you can add a line item, coded to an account such as ‘rounding’ to adjust, the transaction total
Choose the tax treatment
Next to Amounts are, choose whether your whole transaction is:
Tax Exclusive - Each line item is shown before VAT. Tax is calculated on line items and shown separately.
Tax Inclusive - Each line item includes VAT. The tax component is shown before the transaction total.If you open a transaction after it's been approved it displays as tax exclusive, even if you entered it as tax inclusive.
No Tax - No VAT is charged on the transaction. You can't select a tax rate for any line item.
Choose the tax rate
Each account has a default tax rate which might vary depending on the contact or the transaction type. When you create a transaction that is tax exclusive or tax inclusive, Xero applies the default tax rate to each line item.
You can change the tax rate, if required.