How does the VAT Return work?

Xero uses one VAT account, and only includes transactions from this account in the VAT Return. Xero uses your selected tax treatment and tax rate to determine where to include your transactions in the VAT Return.

How does Xero calculate VAT for the VAT Return?

Xero includes VAT in your VAT Return based on the VAT Scheme selected in your Financial Settings.

Cash scheme - Based on the transaction's payment date.

Accrual scheme - Based on the transaction date. VAT on expense claims is included based on the claim's reporting date.

Manual journals are included for both schemes based on the journal date. They will only be included in cash scheme returns if the Show journal on cash basis reports checkbox is selected.

Review how Xero populates each line on the standard VAT Return.

Tax treatment and tax rate on transactions

You can choose whether a transaction has VAT, how Xero will calculate it, and the tax rate Xero applies to each line item.

  • Xero uses the Tax Rate for each line item to calculate the tax on that line. The total tax for the transaction is the sum of the tax on each line.
  • If you select Tax Inclusive or Tax Exclusive for a transaction, the tax rate for each line item will default to the tax rate set for the account or contact. If required, you can change the tax rate for the line item.
  • If you select Tax Inclusive, all line item tax amounts are included in the subtotal.

    Image showing tax inclusive transaction.

  • If you select Tax Exclusive, the tax is excluded from each line item and added on after the subtotal.

    Image showing tax exclusive transaction.

  • If you select No Tax for a transaction, Xero applies the No VAT tax rate to the whole transaction.

    Image showing no tax transaction.

  • If your transaction is reportable on your VAT Return but doesn't incur VAT (VAT is 0%), select Tax Inclusive or Tax Exclusive and choose a tax rate with 0% VAT other than No VAT.
Xero doesn't include transactions using the No VAT tax rate in the VAT Return, however they are listed on the VAT Audit Report.

Only the VAT system account is included in VAT reports

On the default chart of accounts in Xero the VAT account is the system account 820 - VAT. If you create another VAT account in the chart of accounts, Xero won't include it in VAT reports.

If you need a different tax rate, add a custom tax rate. Xero will record tax amounts from transactions using your new rate in the VAT account, and include the transactions in the VAT Return.