Change your VAT scheme in Xero

Change your organisation's VAT scheme in Xero, in consultation with your adviser.

Consult with your accountant or bookkeeper to make sure you understand the implications of changing your VAT scheme, and that you are still accurately reporting to HMRC.

About changing your scheme

  • Only change your VAT scheme in Xero if you have HMRC approval and know the date the change is effective from.
  • Reports in Xero use the organisation's VAT accounting basis on the date the report is run, including where they're run for past periods. We suggest that you publish your past VAT reports before making the change.
  • During the transitional period, you’ll need to adjust the VAT return to account for any transactions that have been included in a VAT return already, or that need to be manually added to the next VAT return.
  • Late claims aren’t included in your next VAT return when you change your VAT scheme. You’ll need to identify any late claims manually.
  • If you change your VAT scheme, the VAT Reconciliation report won't be correct. This is because Xero generates this report based on the VAT scheme applying at the time it's run.

Changing to or from a flat rate scheme

There are some additional things to keep in mind if you're changing to or from a flat rate scheme:

  • When you change to a flat rate scheme, Xero automatically adds some new tax rates and updates the default tax rates in your chart of accounts. For example, your asset and expense account default tax rates change to 'No VAT'.
  • If you change from a flat rate scheme to a non flat rate scheme, the chart of accounts isn't updated. You'll need to change the default tax rates manually. You’ll also need to archive the flat rate tax rates in the Tax Rates screen.

Change your VAT scheme from accrual to cash

  1. Check all transactions in Xero are correct and complete to the end of the last VAT period before the planned change.
  2. Check that you have published all VAT returns up to the date you are changing your scheme. If the change date falls part way through a VAT period, you can create a VAT return for the part of the period that predates the change.
  3. Change your VAT basis from Accrual to Cash in Financial Settings.
  4. Run your first cash basis VAT return for the period after the change and review the VAT return audit report. You need to identify any invoices or bills that were included in any of the previously published accrual basis VAT returns. Do this by comparing the current audit report to the audit reports of the published VAT return.

    You may also like to compare the Aged Receivables Detail and Aged Payables Detail reports, run for the day prior to the scheme change, to the Audit report. Confirm a transaction was claimed in a previous VAT return before you remove it from the current return.

  5. Make a note of any previously claimed invoices and bills and publish the VAT return in Xero. Clear the checkbox File now with HMRC before you click Publish VAT, or File VAT if you have the Standard + All Reports user role.
  6. Export the VAT return to Excel and manually adjust the figures to exclude any previously claimed invoices or bills.
  7. Submit the adjusted VAT return with HMRC using their online gateway.

All future VAT returns can be run normally and submitted to HMRC directly from Xero.

Change your VAT scheme from cash to accrual

  1. Check all transactions in Xero are correct and complete to the end of the last VAT period before the planned change.
  2. Check that you have published all VAT returns up to the date you are changing your scheme. If the change date falls part way through a VAT period, you can create a VAT return for the part of the period that predates the change.
  3. Change your VAT basis from Cash to Accrual in Financial Settings.
  4. Run your first accrual basis VAT return and publish in Xero. Clear the checkbox File now with HMRC before you click Publish VAT, or File VAT if you have the Standard + All Reports user role.
  5. Run the Aged Receivables Detail and Aged Payables Detail reports using the date your final cash basis VAT period ended to locate the unpaid invoices and bills that need to be added to the VAT return. When running each report, select the ‘Outstanding VAT’ option found under Report Settings to include a column for VAT.
  6. Export the VAT return to Excel and manually adjust the figures to include any previously unclaimed invoices or bills.
  7. Submit the adjusted VAT return with HMRC using their online gateway.

All future VAT returns can be run normally and submitted to HMRC directly from Xero.