Adjusting VAT in Xero can be confusing, but it’s important to get right. This article explains when adjustments are necessary, how to use Xero’s built‑in tools and manual journals to correct errors, and why large adjustments may require additional HMRC filings. It also offers tips for keeping your books accurate and compliant.

Stuart Kerr | Published 04/11/25 | Updated 04/11/25

Value‑added tax (VAT) is a fact of life for businesses in the United Kingdom. Sometimes the VAT you record in Xero doesn’t match the amounts you actually owe or can reclaim. Perhaps an invoice was coded to the wrong tax rate, or an Amazon Marketplace fee was posted exclusive of VAT when it should have been inclusive. Small mistakes like this are common, and Xero gives you tools to correct them without having to amend a whole VAT return. This article explains when to make VAT adjustments, how to do them in Xero and what to look out for when adjustments become large.

When to adjust VAT

You only need to adjust VAT if the figure in your return does not reflect what you should have collected or paid. For example, if you accidently coded a purchase as exempt when it should have been standard rated, the reclaimable VAT (box 4 on your VAT return) will be too low. Similarly, if a supplier charged you VAT incorrectly, you may need to decrease the amount reclaimedplusaccounting.co.uk. HMRC expects you to correct errors in the next return, but minor mistakes can be handled by adjusting boxes 1 or 4 in Xero without sending a formal correction. However, if the net value of all errors in a period is more than £10,000 (or over 1% of the box 6 figure), you must submit a VAT652 error correction form instead of just adjusting your returnplusaccounting.co.uk.

Using the Adjust tab in Xero

Xero’s VAT return screen includes an Adjust tab that lets you directly amend the boxes on your return. Start by navigating to Accounting → VAT returns and open the return for the period you want to adjust. Click Adjust next to the box that needs correcting. For instance, if you under‑claimed VAT on purchases, choose Box 4 and enter the amount of VAT you forgot to claim. When you submit the return Xero will record a journal to adjust the VAT control account and the expense account you selectplusaccounting.co.uk. This is suitable for small corrections such as an extra bit of input VAT on office equipment or suppliesplusaccounting.co.uk.

Correcting mis‑charged VAT via a manual journal

Some mistakes require more than the Adjust tab. When Amazon or eBay fees are charged incorrectly, you may need to adjust both the expense and VAT amounts. A helpful rule is to gross up the amount of VAT by multiplying the mis‑charged VAT by six – this converts the net VAT into the gross amount because 20 % VAT is one sixth of the gross pricehelp.linkmybooks.com. For example, if £5 of VAT was missed on an Amazon fee, multiply £5 by six (£30) and post a journal crediting your expense account for £30 and debiting your VAT account for £5. Create a separate line to debit the expense account for £25 with a 20 % tax rate and a third line to credit the expense account for £30 with reverse charge VAT so that the net effect on the expense remains £25help.linkmybooks.com. This journal ensures that your VAT control account reflects the £5 of recoverable VAT and your expense account reflects the correct net cost.

Large errors and late corrections

If your error exceeds HMRC’s threshold (currently £10,000), you cannot simply adjust your next return. HMRC requires you to file a VAT652 form (also called a “late VAT error correction”) to disclose the mistakeplusaccounting.co.uk. Xero doesn’t send this form automatically, so you must complete it manually via HMRC’s website. Once you have HMRC’s confirmation, post a journal or use the Adjust tab to reflect the correction in Xero.

Best practices for avoiding future adjustments

Frequent adjustments often signal underlying bookkeeping issues. To reduce mistakes:

• Set up proper tax codes when you create suppliers and products so that invoices are coded correctly from the start.

• Check supplier invoices for VAT numbers and rates. If something looks unusual (e.g., a supplier with a VAT‑inclusive price when they aren’t VAT registered), query it immediately.

• Review your draft VAT return before filing. Xero’s reports make it easy to drill down into each box. Investigate unexpected spikes or drops in VAT due.

• Document your corrections. Keep notes on why each adjustment was made and store copies of correspondence or credit notes in your file library.

By understanding when and how to adjust VAT in Xero, you can fix small errors quickly, avoid penalties for large mistakes and maintain accurate, compliant records. This proactive approach keeps your books clean and ensures that you never overpay or under‑claim VAT.

About the Author

Stuart Kerr, Partner in Bookkeeping Packages. You can contact him on stuart@bookkeepingpackages.co.uk.