Why your Xero bill is a few pence off the invoice (and neither is wrong)

You enter a supplier's bill in Xero, pick the right tax rate on every line, and the VAT still comes out different from the invoice. Usually by a penny or two. On an invoice with hundreds of small items, it can be more than a pound. The net amounts are right, the rates are right, and the totals still don't agree.

Nobody has made a mistake. The supplier and Xero are rounding VAT at different points, and both are allowed to.

Three ways to round, all allowed

HMRC's rules on rounding VAT on invoices (VAT Notice 700, paragraph 17.5) let a supplier work out VAT in more than one way, as long as it's consistent:

• Per unit or per article. Work out the VAT on each item, round it, then multiply by the quantity. Common where every parcel, ticket or item is priced separately.
• Per line. Work out the VAT on each line's net amount, round it, then add the lines up.
• On the invoice total. Work out the VAT on the whole net amount. The total may be rounded down to a whole penny.

Xero uses the second method. Its developer guide on rounding says it calculates tax on each line, rounds it to two decimal places, then adds the lines up. That's fine when the supplier did the same. When they didn't, the bill drifts.

A worked example

A courier invoice with two lines, both at 20% VAT:

• 200 small parcels at £2.39 each: £478.00 net
• 48 large parcels at £5.43 each: £260.64 net
• Net total: £738.64

The same invoice, three VAT totals:

• Per parcel: 47.8p rounds to 48p, × 200 = £96.00. £1.086 rounds to £1.09, × 48 = £52.32. VAT £148.32.
• Per line (what Xero does): £95.60 + £52.13 = £147.73.
• On the total, rounded down: 20% of £738.64 is £147.728, so £147.72.

If the courier rounds per parcel, Xero's bill is 59p short on VAT and 59p short on the total. Each parcel can add up to half a penny of difference, so the gap grows with volume. That's why postage, courier and other per-item invoices are where people notice it.

Which figure is right?

The one on the invoice. It's the VAT the supplier charged you, and it's the figure your valid VAT invoice supports. Xero's own guide says neither approach is necessarily incorrect, just different. Your bill should record what you were actually charged, so change Xero's figures to match the invoice, not the other way round.

It also matters for paying the bill. If Xero says you owe £886.37 and the supplier expects £886.96, the payment won't match the bill, and someone ends up chasing 59p.

How to fix the bill in Xero

Xero lets you adjust the tax on bills that haven't been paid yet. The steps, from Xero Central's article on tax adjustments, which also notes that Xero calculates tax line by line:

1. Set Amounts are to Tax Exclusive. Tax adjustments on bills need this.
2. Enter each line at the net amount shown on the invoice.
3. Click the add icon on the Tax Rate column to open the Tax Amount column.
4. Type the invoice's VAT for each line into Tax Amount. Xero adds a line above the total showing the adjustment.
5. Check that the VAT and the total now match the invoice exactly, then save or approve.

Only unpaid bills can be adjusted this way. Do it before you pay, not after. And if the same supplier does this every month, make the adjustment a standard step for their bills rather than investigating it fresh each time.

Two traps while you're there

Quantity × a rounded unit price

If the invoice shows 230 parcels for £657.10, the real unit price is £2.856956…, not a round number. Enter it as 230 × £2.857 and Xero calculates £657.11. Enter 230 × £2.86 and you get £657.80. When the line total doesn't divide cleanly, enter a quantity of 1 at the line's total and put “230 parcels” in the description.

The line with no VAT

Mixed invoices often have one line without VAT among lines that have it. Give that line the right 0% rate (zero-rated, exempt or no VAT, as the supplier shows it) rather than the account's usual 20%. They can be reported differently on your VAT return, so the choice matters even though the VAT is nil either way. If you type 0.00 into Tax Amount on a taxed line, Xero won't let you approve the bill until you pick a zero-rated rate.

How Tenet handles it

When Tenet sends an approved invoice to Xero, the invoice decides the tax. Each line gets the Xero tax rate that matches the rate on the invoice. Before posting, Tenet works out what Xero will calculate, the same way Xero does. If the difference is only rounding, Tenet enters the invoice's VAT on each line, the same adjustment described above, so the bill matches the invoice to the penny.

If the invoice uses a rate your Xero organisation doesn't have, Tenet doesn't guess and doesn't post anything. It asks you to choose: add that rate to Xero, which it only does when you click to approve it, or use Xero's own rate on the amounts before tax. If the invoice's tax doesn't come from a single rate, it asks you to set each line's rate rather than averaging. After posting, Tenet reads the bill back from Xero and compares it with the invoice again.