Tax inclusive vs tax exclusive on Xero bills
The Amounts are setting tells Xero whether the figures you type on each line already contain VAT (Tax Inclusive), exclude it (Tax Exclusive), or carry no VAT at all (No Tax). Xero works out VAT line by line and rounds each line to the penny, so the bill total can differ from the supplier invoice by a penny, and you fix it by adjusting the tax amount.
Why is my Xero bill a penny different from the supplier invoice?
Xero calculates VAT on each line and rounds each result to two decimal places before adding them up. Many suppliers calculate VAT once on the invoice total, so the two methods can land a penny apart. Adjust the tax amount on the bill so the total matches the invoice.
Choose the setting that matches how the supplier printed its figures, then check the total against the invoice before you approve.
What does Amounts are do on a Xero bill?
When you create a bill, Amounts are sits next to or under the contact and date fields. Xero Central lists three choices:
| Setting | What you type on each line | What Xero does |
|---|---|---|
| Tax Exclusive | The amount without VAT | Calculates VAT on each line and shows it separately |
| Tax Inclusive | The amount with VAT | Works out the VAT inside each amount and shows it before the total |
| No Tax | The amount | Calculates no VAT, and you cannot pick a tax rate on any line |
You can set a default for all sales and purchase transactions in your financial settings, and a different default for an individual contact. The contact default wins. If your VAT Scheme in financial settings is None, new transactions default to No Tax. (Xero Central: Set the tax treatment on transactions)
How the setting changes line totals
The setting changes what your typed number means, not the tax rate. At a 20% rate:
- With Tax Exclusive, a line of 100.00 becomes 100.00 net plus 20.00 VAT, so the line is 120.00.
- With Tax Inclusive, a line of 120.00 is read as 100.00 net plus 20.00 VAT. The line is still 120.00.
- With No Tax, a line of 100.00 stays 100.00 and no VAT is recorded.
Pick the setting that mirrors the invoice. If the invoice lists net prices and adds VAT at the bottom, use Tax Exclusive. If it lists prices that already include VAT, as many receipts do, use Tax Inclusive. Choosing the wrong one gives a total that is out by the full VAT amount, not by a penny.
One quirk to know: if you open a bill after it has been approved, Xero shows it as tax exclusive, even if you entered it as tax inclusive.
Why is the bill total a penny different from the supplier invoice?
Xero calculates VAT on each line and rounds each result to the nearest penny, then adds the rounded amounts to get the VAT total. Xero Central says this follows HMRC's guidelines. Many suppliers instead apply 20% once to the invoice net total. Both are valid, but on an invoice with several small lines they can differ by a penny or more.
Xero Central names this difference and points to a VAT adjustment as the fix when the VAT total differs from the source document. (Xero Central: Set the tax treatment on transactions)
Worked example
This is an illustrative example, not a real invoice. A supplier invoice shows:
| Line | Net |
|---|---|
| 3 labels at 1.12 each, entered as three lines | 1.12, 1.12, 1.12 |
| Delivery | 20.00 |
| Net total | 23.36 |
| VAT at 20%, calculated on the net total | 4.67 |
| Invoice total | 28.03 |
The supplier worked out 23.36 x 20% = 4.672, which rounds to 4.67.
You enter the bill with Amounts are set to Tax Exclusive. Xero rounds each line: 0.224 becomes 0.22 for each label line, and delivery is 4.00. The VAT total is 0.22 + 0.22 + 0.22 + 4.00 = 4.66. The bill total is 23.36 + 4.66 = 28.02, one penny below the invoice.
With Tax Inclusive you would type the gross figures and the total you typed would stay fixed. The penny then moves into the VAT figure Xero derives on each line, so you still check the VAT amount against the invoice.
How do I fix the rounding difference?
For bills in a UK organisation, adjust the VAT amount. Xero Central gives these steps for bills, supplier credit notes, prepayments, spend and receive money transactions and manual journals:
- In the transaction, set Amounts are to Tax Exclusive.
- Click the add icon on the Tax Rate column to open the Tax Amount column.
- Enter the VAT amount from the supplier invoice (4.67 in the example). Xero adds a line above the total to show the adjustment.
- Save or approve the transaction.
The bill total becomes 28.03 and matches the invoice. (Xero Central: Adjust the VAT amount on unpaid transactions)
Rules from the same page:
- You can adjust only when creating a transaction, or when editing one with no payments or credit allocations applied.
- Do not adjust lines that use the No VAT or Exempt tax rates. They are not in VAT returns but still affect your VAT account.
- If you are unsure when an adjustment is allowed, Xero points to section 17.5 of HMRC's VAT Notice 700 or your accountant.
A rounding line instead. In organisations where Xero does not let you adjust tax amounts, Xero Central suggests adding a line item categorised to an account such as rounding, so the transaction total matches (Xero Central, tax treatment, US and other regions). A rounding line changes the net amount and lands in whichever account you choose, so in the UK prefer the VAT adjustment for a tax-only penny.
Checks before you approve
- Compare the net, VAT and gross figures on the bill with the invoice, not just the gross.
- Confirm Amounts are matches how the invoice prints its prices.
- Check each line's tax rate. A wrong rate gives a difference bigger than a penny, and a rounding fix will hide the real error.
- Make the correction before recording a payment, because the adjustment is locked once payments are applied.
If the difference is larger than rounding, work through the checks for invoice lines that do not add up. If you capture invoices with Datamolino, the Xero integration exports bills as Invoice Total, Tax Summary or Line Items. Invoice automation shows the captured summary beside the sum of coded lines, and the Xero export has a Send exact tax amount option for a tax-only difference. For when line detail matters at all, see line items vs invoice totals.
Can I change Amounts are after I have approved a bill?
Xero Central says an approved transaction opens as tax exclusive even if you entered it as tax inclusive. Tax adjustments are only possible on unpaid transactions with no payments or credit allocations applied, so make the correction before you record a payment.
