Tax Exclusive and Tax Inclusive – what’s the difference?

When inputting transactions in Xero have you noticed the option to choose between Tax Exclusive and Tax Inclusive?

And if you have noticed, do you understand the difference?  If you are unsure, hopefully this article will make things clearer for you.

Tax Exclusive and Tax Inclusive

I’ve done an explainer video which you can watch here.  For those of you who prefer to read rather than watch, I’ve also added the video chat below.

Here’s the video …


And here’s the video chat …

Earlier today I had to explain this to a client. I realised that sometimes what you think is very straightforward is not always easy for other people to understand.  I think that’s possibly the case with what Xero has done here. They’ve tried to make something really user friendly (and it is), but but only if you understand.

In Xero, Tax = VAT

So, the first thing I would say – when you’ve got a field in Xero and it says ‘Tax’, the chances are it’s referring to VAT. Because Xero is global, that’s probably why they use the word tax. It means they don’t have to say VAT in the UK and Gross Sales Tax in another country.

So there’s two options when you input information in Xero. You choose between ‘Tax Exclusive’ and ‘Tax Inclusive’.

Tax Exclusive and Tax Inclusive – let me explain with a real life example

My 2018 Diary


It’s December, it’s almost the end of the 2017, so let’s pretend that I’ve gone out to Tesco and I’ve bought myself a new diary for next year. I’ve paid £12 for it so the cost of the diary is actually £10 plus £2 VAT. I’ve got a receipt from Tesco which I will input in Xero. I’ve paid for it personally so I will input it through the Expenses module.



When I go to input my receipt in Expenses I get asked, “Is this Tax Inclusive or Tax Exclusive?” And the answer depends on how I want to input the information. If we look at the receipt from Tesco you will clearly see that the amount paid for the diary was £12. You will have to do a bit of fishing around to find the VAT, whereas the full amount is very easy to see.

So what have Xero done?

They’ve said OK, if you want to input your receipt as £12 that’s fine. Xero will calculate the VAT for you. All you have to do is tick the box in Xero that says this amount is ‘Tax Inclusive’.  Then you just input your Expense, code it to Stationery and say that it was £12 inclusive of tax. Xero will then automatically work out that there’s £2 VAT on the transaction.

If you tick ‘Tax Exclusive’ you would then input the amount as £10, i.e. the value excluding the VAT amount, and Xero would add on the £2 for you.

Why are there 2 different options in Xero?

So, why are there these two different options? Well, I’ve never checked with Xero but in my mind it’s simply that when you have your receipt from Tesco, it allows you to input it as the full amount of £12. There is no need for you to split out the VAT amount, Xero will make life easier by doing it for you.

Invoice for Diary


Now, let’s say that we hadn’t bought the diary from Tesco, we’d gone to our stationery supplier. And our stationery supplier sent us a proper, official looking purchase invoice for this diary.



Because this invoice is  from a VAT registered supplier, it will be very clear on it what the VAT amount is. The invoice will probably show the amount as £10, and then further down the invoice you will see the VAT added on. So, the number that’s easy to spot on this document is probably the £10, not the £12. If you’re inputting the £10, you would tick the box that says it’s ‘Tax Exclusive’.

In Conclusion

If you have a document, there’s VAT on it, but it’s maybe not that clear, Xero have just made life easy for you with an option that’s VAT or ‘Tax Inclusive’.

Remember, in Xero tax means VAT.

‘Tax Exclusive’ means that you would input £10 in this example and Xero would add on the £2 VAT, giving you the total of £12.

‘Tax Inclusive’ means you would input the transaction as the full amount (£12) and again Xero would do the calculation, this time showing that the £12 includes £2 VAT.



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