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Community > Small Business >

Does Xero calculate VAT correctly?

Started by james mcilwraith -   in Small Business

Xero calculates VAT for each line item and rounds it as per HMRC regulations 17:5:1. However Xero then calculates the total VAT for the invoice by adding up all the rounded VAT figures not by adding up the original whole numbers rounded down to the nearest penny, as per 17:5:1

The difference between the Xero per line rounded VAT total and the total VAT rounded just once is therefore often more than HMRC will allow by some margin

HMRC website will not accept our VAT returns produce by Xero as it says the calculations are wrong. I have to export the numbers to Excel to correct the report

We have only noticed this because a lot of our products cost the same and so you can see the rounding adding up.

Does anyone else have this issue? as usual Xero's caring response is "meh!"
Not aware of any issues with the VAT calculations in Xero.

What is the error HMRC gives when you try to submit VAT return figures from Xero? And what is being done in Excel to correct the return?

John Knight  

The problem is I have set out, Xero adds up all of the rounded Vat line amounts and call's this the total VAT payable.
What it should do is add up all the unrounded VAT line amounts and round them only once to calculate the VAT payable.
What I do is to correct this in Excel is to re-calculate the VAT from the net invoice total amounts.
I think that we see this problem because the bulk of our products cost the same and often a customer will order the same amount of various items. for example 5 cases of each of 5 different line items. This means that if Xero rounds one line by .5p then all five lines are rounded by .5p and so the VAT rounding for the invoices is 2.5p. On a random spread of price points and item amounts you wouldn't see it going on.
Never the less the way Xero handles VAT is wrong as far as I can tell.
The first time I noticed it HMRC web site wouldn't accept the figures as it said the amount of VAT I was attempting to pay was to high.....

james mcilwraith  


Xero calculates VAT for each line of an invoices (or bill) and rounds that calculation to the nearest 1.0 pence. The invoice subtotal and VAT total figures will be the totals of the rounded net and VAT amounts from each line. Doing it this way does mean that there can be small rounding differences (both up and down) between the VAT total and calculating VAT at 20% of the net subtotal. However, section 17.5 of VAT notice 700 does allow software providers to do this when calculating VAT from item lines on invoices of goods or services.

As for the VAT return:
HMRC will check whether the box 1 amount (which will include pence) is more than 20.0% of the box 6 figure (rounded to whole pounds) and give a warning if the calculation exceeds 20.0%. So, with Xero, it is possible to have a multi line invoice with a net subtotal of £8.37 and total VAT of £1.71 (calculated from each line). This would give a warning on the VAT return as 1.71 / 8 = 21.375%. However, it is just a warning and there is no need to correct the figures in Excel as HMRC would allow you to proceed and submit those figures.

John Knight  

Hello John, whilst HMRC are always are always much more relaxed when you are paying more tax than necessary, never the less it should be calculated correctly. I have taken this up with HMRC and they said that VAT must be calculated on the invoice total and only rounded once. Apparently HMRC have won some case involving Wetherspoons about exactly this point.

james mcilwraith  

Hi James
I suggest taking this up with your accountants or a VAT specialist, which I am not. You may not get accurate advice from phoning HMRC's helpline.

JD Wetherspoon v HMRC may be the case you are referring to but I believe Wetherspoons lost because it wanted to round down the VAT calculation on each item line and not follow HMRC's guidance.

Xero is included on HMRC's list of approved software suppliers for VAT returns so presumably does follow HMRC's guidance??

John Knight  

Hi John
I typed you long a reply, but it vanished when I posted it, which is always annoying, sigh.
The shortened replacement version is this.

Thanks for the link, seems that it was mostly about a quarrel between wholesaling and retailing rather than rounding itself.
I asked HMRC about the "approved" list and they said it only applied to the way the portal operated and didn't endorse how any package calculated VAT.
It seems that HMRC don't care that much for wholesale sales as the your output is someone else's input. Probably for mixes wholesale/retailers like ourselves Xero is wrong as it should round to 0.1p. However air also seems that all the small accounts packages do it like this and you have to go to Sage line 200 or Microsoft Dynamics to do it properly.
So the solution is to be a face in the crowd and to ignore the problem :)
Thanks for your input

james mcilwraith  

Xero's default method of calculating seems to conform to HMRC's VAT Guide but may not be the most appropriate for your business if it mixes wholesale and retail sales. So a better solution would be to take professional advice rather than ignore the problem? Certainly take advice before jumping to a vastly more expensive accounting package.

John Knight  

Xero doesn't really follow the guidelines as its approach is a too simplistic "one size fits all" one, for example rounding down specifically isn't allowed on retail sales. It would also be better if it had the option of calculating the VAT on invoice totals rather than just per line basis, but HMRC don't really seem to care that much about a few pence at the small business level and so I shall stop worrying about it.
Thanks for your helpful comments.

james mcilwraith  

I am disappointed with Xero's approach to VAT calculation. When submitting an invoice for expenses where some already have VAT paid, Xero's rounding results in over-charging of VAT.

Christopher Hart