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.

If you select None for your VAT Scheme in your Financial Settings, all transactions for your organisation will be No Tax. You won't be able to select a different tax treatment or tax rate.

How tax is calculated

If your transaction has more than one line, Xero calculates VAT on each transaction line separately. Xero rounds each line's VAT amount to two decimals, and adds them all up to make the total tax for the transaction. This means the calculated tax total can be slightly different to that calculated by applying a percentage to the subtotal. Xero doesn't let you automatically round your invoice totals up or down. You can bring the invoice total to the correct figure by adding an additional line item to the invoice, coded to an account such as rounding adjustment.

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.

    Image showing tax exclusive transaction.

  • Tax Inclusive - Each line item includes VAT. The tax component is shown before the transaction total.

    Image showing tax inclusive transaction.

    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.

    Image showing no tax transaction.

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.

Image showing tax rate field on invoice.

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